The “Master Mind Group” may be defined as coordination of knowledge and effort, in a spirit of harmony, between two or more people, for the attainment of a definite purpose.” The economic feature was first discussed by Andrew Carnegie, who had a group of 50 men, with whom he surrounded himself for the definite purpose of manufacturing and marketing steel. A group of batteries will provide more energy than a single battery. The brain functions in a similar way. The Master Mind Group principle is simple-- when a group of individual brains are coordinated and function in harmony, the increased energy created through the alliance becomes available to every individual brain in the group. Henry Ford began his business career under the handicap of poverty, illiteracy and ignorance. Within an inconceivable short period, he overcame these obstacles and noticeable strides were made when he became friends with Thomas Edison. The acquaintances of Harvey Firestone, John Burroughs and Luther Burbank further accelerated his economic gains through the use of this Master Mind Group Principle. People take on the nature and habits and power of thought of those they associate with in a spirit of sympathy and harmony.
Napolean Hill
In this same principle, we strive to enhance the financial situation for subscribers of Canadian Feedlot and Cattle Market Analysis through dialogue and discussion and of course, written analysis. Subscribers are part of this Master Mind Group. Producers need to expand their minds.
Market Overview
For the first 6 months of 2010, the US Beef cow slaughter was 13.2% above last year and 18% above the 5 year average. We have once again raised our beef cow slaughter projection as this pace will likely be maintained into September. Cattle futures made monthly highs on stronger demand and lower market ready supplies. Temperatures in Kansas reached over 100 degrees Fahrenheit this past week. Cattle gain less weight and inefficiencies occur during extreme temperatures. Live cattle futures are strengthening on cash market strength and lower expected production. Feedlots in Kansas reported sales at $95/cwt, up $2 from last week; Nebraska cattle were changing hands at $95/cwt to $96/cwt on a live basis and dressed sales were $150/cwt to $152/cwt.
Feeder cattle prices are expected to stay firm and ratchet higher into the fall period. The US cattle inventory report showed feeder cattle outside feedlots down 2.2% from last year and also confirmed the contracting cattle herd. This report also confirmed that US producers have no intentions of expanding this year. US feeder cattle supplies will be down from year ago levels enhancing demand for Canadian feeder cattle during the fall period. Positive feedlot margins are also setting a positive tone to the feeder market. Usually the feeder market grinds lower in last half September and into October but we expect a slow climb throughout the fall and into spring of 2011.
North American feedgrain markets are firm due to lower Canadian barley supplies and tighter US corn fundamentals. World feedgrain values have also jumped sharply over the past 3 weeks due to dryer conditions in Russia, Kazakhstan and Europe. Canadian barley acres are the lowest in 30 years and yields may come in lower than expected. We are forecasting higher barley and corn prices for the 2010/11 crop year.
The Canadian dollar looks positive and is expected to reach the par level over the next couple months. The Bank of Canada increased interest rates by 0.25% and will likely continue with a tighter monetary policy longer term. Fiscal policy is also positive due to a narrowing of the budget deficit. Larger revenues and less spending this past quarter have put the Canadian Government in a better than expected financial position moving forward, which is positive for the Canadian dollar.
Canadian Cattle and Beef Supplies
Cattle on feed as of July 1, 2010 in Alberta and Saskatchewan were reported at 787,569 head, up 2% from 771,000 head in 2009. June placements were a meager 67,000 head, down a whopping 31% from June of 2009; June marketings were reported at 194,786 head, up 14% from last year. The larger marketing pace was largely due to the export program but the Canadian domestic slaughter is also running above last year. For the week ending July 10, the year to day Canadian slaughter was 1.696 million head, up 4.1% over last year. Year to date Canadian beef production was 1.349 billion pounds for the week ending July 10, up 6.4% over 2009 for the same period.
We expect a larger year over year marketing pace in July and August; Carcass weights are 20 lbs below last year so there is limit how many cattle can be pushed forward. Cattle on feed numbers will likely drop below year ago levels in October. Canadian basis levels are expected to start strengthening because on feed numbers are similar to last year. Lower on feed numbers and steady demand from the US, will cause local packers to be more aggressive. We expect Canadian packers will have historically strong basis levels during the fall period due to a lack of market ready supplies in Alberta and Saskatchewan. The domestic market needs to ration demand away from exports.
We have updated our slaughter cattle export chart above showing official USDA data with the July projection. Notice exports are above year ago levels every month in 2010, except for April. During the fall of 2009, Canadian feeder cattle exports were quite low resulting in larger placements in Alberta and Saskatchewan, which continued into spring. Larger supplies of fat cattle during spring resulted in the surplus moving south. Local packers could have a discount relative to US packers and still receive sufficient numbers. Now that our on feed numbers are similar to last year, it appears that the burdensome Canadian supply situation has been cleaned up. Lower placements during May and June will contribute to the lower export pace of slaughter cattle in the final quarter of 2010.
Canadian January through May beef exports to the US were 374.1 million pounds, up 9% from 333.7 million pounds in 2009. We expect another 10% increase in beef exports to the US in 2011 as their domestic production drops sharply, especially in the first quarter of 2011. Total Canadian beef exports to all countries for 2010 are expected to reach 530,000 mt, up from 480,000 mt in 2009. Canadian per capita consumption on a retail weight basis is expected to be 21.5 kg per person in 2010 compared to 21.8 in 2009. Canadians have slightly reduced beef intake but Canadian beef production is higher due to stronger export demand, which is a positive signal. Canadian unemployment is currently at 7.9%; the economy added 227,000 jobs over the past 3 months. Canadian GDP grew at 6.1% in the first quarter and second quarter GDP should be in the range of 4.5% to 5.5%. Canadian incomes have not decreased as significantly as our US neighbors therefore, beef demand has remained firm. In conclusion for this section, Canadian basis levels will need to strengthen September through December as local packers secure their supplies.
US Cattle and Beef Supplies
US cattle on feed as of July 1 were 10.070 million had, up 3% from 9.852 million head on July 1 of 2009. Placements were 1.628 million head, up 17% from July of 2009 while marketings were 1.997, basically the same as last year. The cattle on feed number were within pre report estimates and this is the second month in a row that on feed numbers are above last year. Pasture conditions were very favorable earlier in spring causing cow calf producers to hold back on marketings; however, it now looks like these lighter calves are fully placed. We may see some slight increases in fourth quarter beef production but we don’t feel this will change our price outlook.
For the week ending July 24, 2010, the US weekly slaughter was 667,000 head, up 7.1% from last year. This brings the year to date slaughter to 18.779 million head, up 1.2% over 2009 for the same period. Weekly US beef production was 511.5 million pounds, up 5.6% from last year while cumulative production was 14.316 billion pounds, down 0.8%. Dressed weights are averaging 770 pounds, down 12 pounds from last year for the same period. Larger slaughter pace but lower beef production. We want to draw attention to beef production estimates for the final quarter of 2010 and first quarter of 2011.
US Beef Demand
A 1% increase in retail spending or consumer expenditures equals a 1% increase in beef demanded. Recent data shows that retail sales fell by 0.5% in June following a 1.1% drop in May. Analysts had expected retail sales to drop by 0.2% so this was more than expected. Consumers appear to have cut back on big purchases but department store sales posted a 1.1% gain over 2009. The International Council of Shopping Centers’ index showed a 3% gain in the sales for June in comparison to last year.
The USDA reported at home food spending for June down 2.8% from last year; May was down 2.9% from May 2009. However, despite people spending less money on home food purchases, away from home food purchases were up 8.7% in June following a 5.2% in May. When cattle hit the $100 level back in spring of 2010, away from home spending was up 8.6%. We find that consumers are spending more money eating out which is supportive for choice product values. The forecast for the remainder of 2010 shows that at home spending should be equivalent to year ago levels in the third and fourth quarters of 2010. Away from home spending should be up 6% in July, 7% in August and then up 7% to 9% for the remainder of the year. The business traveler and expense account spending should result in higher “away from home” numbers once the children are back in school. The main point is that for the third and fourth quarter of 2010, at home food expense should be the same as last year and away from home spending should be up from 2009, therefore, overall beef demand should increase. To put this in perspective from our previous issue, US consumers cut back sharply on the food bill during 2009 but we are now seeing a change in consumption patterns.
The consumer price index for “at home food purchases” and “away from home purchases” is expected to increase by 1.5% to 2.5%. More specifically, the USDA is forecasting retail beef and veal prices to increase by 1% to 2% on an annual rate for 2010. This increase will have to come in the second half because first half retail prices were mostly below 2009.
Looking at the current situation, wholesale beef prices made two week highs due to stronger retail demand. Just over 50% of all beef sold is in the trimmings category and lower US beef imports from Argentina and Australia has supported the hamburger market. Hamburger is the largest end use of beef in the US. Favorable barbeque weather has also contributed to the stronger demand for hamburger over the past two weekends. We expect summer temperatures to enhance demand over the next month.
Average US regular ground beef prices are at 2 year highs, $2.40/lb; Average retail round steak USDA choice is also at 2 year highs, $4.429/lb, Chuck roasts are off 2 year highs by 20 cents/lb but still relatively strong at $4.054/lb. Low end and high end meats are strong which is a positive signal. Middle meat demand increased during the recession as restaurants lowered menu prices. However we are in a transition period back to normal meat price relationships.
US unemployment is expected to hover at 9.5% for the remainder of 2010 and then start to improve in 2011. The Federal government is working on ways to extend credit to small business, which has been responsible for 60% of job growth over the past 15 years. The decrease in credit lines, home equity loans and cuts in credit card lending have made it difficult for start up companies and small business expansion. Larger corporations only shed 3 million jobs through the recession. A Federal program extending credit would be a powerful injection to the US economy and we may see a program as early as January 2011.
The US Senate passed the bill to restart jobless benefits. This bill will give 5 million people $309 per week. Approximately 30% of the individual benefit spending will go into food. There were 2.5 million Americans, who were cut off on June 2 and these people will receive retroactive payments. This could cause a nearby temporary surge in beef demand.
Because inflation isn’t a concern for the economy, the US Federal Reserve has justification for keeping interest rates near zero. The US consumer price index dipped by 0.1% in June. The lower interest rate is generally supportive for commodity prices and equity markets while being negative for the US dollar.
US Mortgage applications increased this past week as 30 year home loans were at record lows. There are signs that the housing sector is turning a corner. Some analysts feel that the California market started to improve last February and this will spread to other parts of America. Homes in major centers such as Phoenix, are now affordable to the average working person. To reiterate from earlier comments, the housing industry is not getting worse and small improvements will be a positive signal to the economy and will support consumer confidence and result in lower unemployment longer term. US housing prices rose for the third straight month in May.
McDonalds Corp net income climbed 12% in the second quarter as US sales jumped 3.7% and European sales increased by 4.6%. McDonald’s has 14,000 stores in the US and operating income reached $895.1 million, up 7% over last year. McDonald’s has about 32,000 stores world wide. This is a positive economic and beef indicator for US and Europe.
In conclusion, the US economy is stabilizing and consumer spending on food is increasing resulting in stronger beef demand. July is usually a period of seasonal slow consumption but the market is holding up fairly well. Beef purchases generally increase into the Labor Day weekend and continue into October. Beef prices are under a supply constraint which has limited the downside. Notice how choice beef prices are trading in a new fundamental price range above the $150/cwt area. This is necessary to support stronger cattle prices longer term. Retail and restaurant prices will need to increase next year as wholesale retail spread stays relatively narrow. Due to the growing demand and tighter supply scenario, we have increased the upper limit on our fed cattle price outlook.
US beef exports for 2010 are expected to reach 2.088 billion pounds, up 30 million pounds from earlier projections and up from 2009 exports of 1.869. Imports are expected to be 2.508 billion for 2010, down nearly 100 million pounds from 2009.
Our concluding chart shows beef supplies for the US domestic market. (Production plus imports minus exports minus ending stocks). Notice the declining supplies each quarter for 2010 but we want to draw attention for the first quarter of 2011 where supplies are down nearly 350 million pounds in comparison to the first quarter of 2010.
In this section, we have price forecasts and recommendations for the next 4, 6, 8 and 12 month periods. We reserve this only for paying subscribers.
Feeder Cattle
We start our discussion on feeder cattle with the US Cattle Inventory Report.
The number of feeder cattle outside feedlots was down 2.2% from last year.
The cattle inventory report basically confirms our earlier projections. The 2010 calf crop is expected to be down 1.2% in comparison to 2009. There is no sign of heifer retention or herd expansion. We actually expect further declines in the 2010 calf crop on the January 2011 report given the current cow slaughter.
Feeder cattle values remain firm despite the higher feedgrain prices. Current prices for 5 weight steers are 11% above year ago levels while 7 weight steers are 8% higher on average. Favorable feedlot margins are renewing buying enthusiasm at a time when available supplies are seasonal lows.
Feeder cattle demand is based on the price of live cattle and feedlot margins relative to the feedgrain input costs. During the historical commodity rally during the spring of 2008, deferred live cattle futures were trading $10 above the nearby futures but feeder cattle prices did not make new historical highs. This was due to corn futures reaching over $7.50 per bushel.
Feeder cattle prices usually make seasonal highs during the first week of September. However, we don’t see prices easing after this timeframe for two main reasons. Corn harvest pressure will weigh on the feedgrains market which could contribute to a counter seasonal trend in late September and October. Secondly, 2011 April live cattle futures near $100/cwt will keep buying interest quite strong given the potential for record high fed cattle in late March and the first half of April.
Western Canada will have abundant feed supplies in the form of greenfeed, hay and silage. Many farmers in Alberta and Saskatchewan seeded barley and oats, in late spring and early summer as a last resort. Last year, we saw many cow calf producers hold on to their calves and background over the winter. We expect to see this activity again this year. Remember in 2009, the yearling run was drawn out into October due to the favorable feed situation. Producers were also holding out for higher prices and they could afford to wait because they were not under pressure to liquidate due to feed shortages. We saw very strong buying interest for grass cattle in the spring of 2010 and these buyers may hold onto cattle longer than normal, similar to last year. They may also chose to background their own cattle which will limit the available calves September through January.
Another factor to consider is heifer retention. Given the large cow slaughter, there is bound to be some heifer retention for herd maintenance. In past history, the US cow calf producer needs to have 1 year of higher prices before heifer retention starts for herd expansion. Heifer retention for herd expansion could be a significant factor starting in February of 2011. The US cow calf producer will have experienced 1 year of better financial returns so they will be inclined to hold back on heifers at this time.
We expect larger Canadian feeder cattle exports during Sept through December, similar to 2007 and 2008. Demand from US feedlots will be strong given their lower calf crops and favorable feedlot margins.
In conclusion,...
In this section, we have price forecasts for feeder cattle and recommendations for Cow Calf operators and Feedlot operators. We cover the next 2, 4, 6, 8 and 12 month periods. We reserve this only for paying subscribers.
Feedgrain Outlook
Cash barley prices in Southern Alberta reached up to $166/mt this past week. The Canadian barley market appears to be factoring in the tighter fundamental structure for 2010/11. Barley acres are the lowest in 30 years and yields are also very uncertain at this time. Yellowing and premature heading due to excessive moisture is common in many fields. Therefore, we may see the average yield come in lower than our projected 58 bushels per acre. Final acreage is also a large variable at this time because we don’t know how much barley will be taken off for silage or greenfeed. There was significant seeding progress throughout June and warm temperatures throughout September are needed for complete maturity.
The CWB pool return outlook for feed barley is $143 cdn mt instore Vancouver which equates to $83 in Alberta. At this time, even malt barley should be moving into the feed market given the current CWB price. The Domestic feed barley market is $60 to $80 premium over CWB expected pool return outlook for feed barley. (Depending on location in Western Canada)
During the drought years of 2001 and 2002, there was 3.0 million mt of US corn railed or trucked into Western Canada. This year, we expect 2.0 million mt of DDGS and 1.5 million mt of corn to make up the short fall of feed supplies.
The function of the barley market is to ration demand. We need to see Lethbridge barley prices trade at $15 premium to delivered corn values. Barley prices have potential to rally an additional $20 to $30 over the next 6 to 8 months.
World values for wheat, corn and barley have been ratcheting higher due to adverse wet conditions in Canada while Europe and Russia are suffering from dryness and heat. We will provide a brief overview of each major producing region.
Russia and Kazakhstan have experienced severe dry conditions over the past month with record breaking temperatures. This has tempered yields on the winter wheat while severely hurting the spring wheat and corn crops. No change in the weather pattern is expected over the next 15 days. Northern Ukraine is experiencing similar conditions but the southern region received rains on the winter wheat during the major harvest period, which caused quality to decline. Russia is debating whether to start releasing domestic grain stocks to domestic processors in an effort to ease inflationary factors. We have seen serious declines in Russian and Kazakhstan production estimates.
France, Germany, Poland and Bulgaria have also experienced adverse dry and warm conditions for 3 weeks. The winter wheat crop was in the final stages of development but similar to Russia, the spring wheat and corn crops have been hurt severely.
Looking at US corn, the Southern Plains region is experiencing extensive heat tempering corn yields. For the first 3 weeks of July, a large portion of Indiana, Illinois and Ohio received less than 50% of normal precipitation while temperatures have been slightly above normal. The US corn crop was rated 72% good to excellent as of July 17 but we expect to see some lower crop ratings on upcoming reports. The USDA estimated the 2010/11 corn carryout at 1.3 billion bushels. Due to the adverse conditions is certain areas, the market may incorporate more of a risk premium due to the uncertainty in production, especially if crop ratings deteriorate as expected.
We have seen in past years how sensitive the wheat, corn and barley markets are to sudden supply changes. During 2006 world wheat production was historically low at 585 million mt. Higher prices encouraged production over the next two years causing wheat production to increase to 690 million mt in 2008. For 2010, world wheat production will likely come in near 645 million mt, the middle of this extreme range; therefore, we don’t see much downside in wheat prices. Major exporters such as Canada, EU and Russia will actually have tighter carryouts in comparison to 2006/07. The US will be the price leader because if a major importer needs large stocks of wheat, the US will be the main supplier. The US is the only major exporter with burdensome supplies.
World corn ending stocks in the 2006/07 crop year finished at 108 million mt while the US carryout was 33 million mt. At the end of 2008/09, world stocks had risen to 147 million mt and US corn ending stocks were 42 million mt. For 2010/11, world ending stocks are estimated at 135 million mt and US stocks will dip to 34 million mt. The US by itself is in a similar position to 2006/07, when corn futures made historical highs. It is important to note that Black Sea corn is trading at $180 usd mt or $4.50 per bushel; US corn out of the US Gulf is priced at 163 usd mt. The world market will start to focus on US corn given current price relationships and freight spreads. US corn is most competitive to Southeast Asia and only $10/mt higher than Black Sea corn into the Middle East.
In conclusion,...
IN this section, we have price forecasts for feedgrains and recommendations for feedlot operators. We reserve this only for paying subscribers.
Canadian Dollar Comment
Canadian bond prices are under pressure as investors look for riskier assets. Lower bond prices equal higher yields which is supportive for the Canadian dollar. Canadian June inflation was reported at 1.0% in the month May, which suggests that the Bank of Canada can be patient with further interest rate hikes. The Central bank increased rates by 0.25% this week to 0.75%. It looks like spill over strength from the crude oil and stronger equity markets were also supportive to the Canadian dollar. Over the past two weeks, we have seen a sharp jump in the Euro, which also weighs on the US dollar while inadvertently, supports the loonie.
Fiscal policy looks favorable as the budget deficit narrowed to just over $4.2 billion during January and February of 2010, down from 7.2 billion in 2009. The improvement came from personal income taxes, provincial sales and service taxes. It looks like the annual deficit will come in sharply lower than earlier projections. The January February deficit included 1.7 billion of stimulus spending which is starting to ease now that the economy has stabilized.
Canada remains a bright spot to invest on the global picture and rising commodity prices will enhance demand for Canadian dollars. Our trade to the US has slowed but we expect better trade in the latter part of 2010 due to larger oil exports and the recovering auto sector. Two main factors driving the Canadian economy.
The next section includes charts and technical analysis showing our price projections. These charts are of barley, corn, equity markets, crude oil, US dollar index, live cattle and feeder cattle. We discuss investment fund money flow and discuss the overall economy in relation to beef demand. We also show supply and demand tables for the commodities in combination with the technical analysis. This is a very clear picture of the price structure and forecast.
The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or Futures or Futures Options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future.
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