BeefWatch: Canadian cattle herd increases, strong beef demand seen from consumers

The third quarter brought opportunities and challenges as strong beef demand warrants cautious optimism for producers who must still contend with a year of drought. The Canadian cattle herd has reportedly increased for the first time since 2017 with beef breeding heifer numbers up on July 1. Beef exports have surged with strong consumer demand in North America and around the world. The incredible demand has supported the fed and feeder cattle prices in the face of record-high grain prices. The flow of cattle has kept slaughter utilization in Canada at 95 per cent year-to-date. The quantity of Prime and AAA beef produced in Canada has never been higher and has filled the seasonal midsummer slump in production. The world wants beef and the Canadian beef industry’s efforts to respond have been impressive.

Cattle Inventories

July 2021 sees increase in Canadian national cattle herd

Canadian cattle inventories on July 1, 2021, were at 12.29 million head, 0.2 per cent higher than July 1, 2020. This year is the first reported increase in the total national cattle herd since 2017. The increase is attributed to both more calves and more cattle imports. Total inventories increased in all provinces except Alberta (-2.2 per cent) and Atlantic Canada (-0.1 per cent). The decline in Alberta inventories was primarily from declining beef cows (-59,800 head), slaughter steers (-38,300 head) and slaughter heifers (-34,700 head).

Beef cow numbers appear to have decreased again this year, by 1.7 per cent, to 3.55 million head. This is the fourth consecutive year the beef cow herd has reportedly declined, making it the lowest number reported since 1988. In the East, beef cow numbers were down 3.4 per cent, mostly in Ontario (-5.2 per cent) but also in Quebec (-1.3 per cent), while Atlantic Canada was up (+0.5 per cent). In the West, beef cows were down 1.4 per cent, with declines primarily in Alberta (-4.1 per cent), and Manitoba (-0.7 per cent), while British Columbia (+1.4 per cent) and Saskatchewan (+1.3 per cent) increased. These numbers were reported before many regions started culling due to drought.

Source: Statistics Canada

Beef breeding heifer numbers increased substantially, up 3.8 per cent from last year to 654,700 head. This increase is the first for the beef breeding herd since 2017. Given the summer conditions it is questionable whether all these heifers will stay on farm this fall. Heifer placements in Alberta and Saskatchewan feedlots were at 29 per cent of all placements this July, up from 25 per cent in 2020 but down from the five-year average for July which is 37 per cent. The percentage of heifer placements in August at 40 per cent moved right near the five-year average for August at 41 per cent. The number of calves (under one year) was up by 1.4 per cent to 4.06 million head, marking the third consecutive year the calf crop has increased.

U.S. national cattle herd in third year of liquidation

Cattle inventories are shrinking as the U.S. manages its ample fed cattle supply. Current liquidation trends indicate that the U.S. and Canadian herds could simultaneously consolidate over the next two to three years, potentially leading to an integrated North American herd expansion by the mid-2020s.

The USDA July 1, 2021, inventory report shows total cattle inventories at 100.9 million head, down 1.3 per cent from July 2020 — the third consecutive year of decline. The number of feeder heifers (>500 lbs.) and feeder steers (>500 lbs.) declined by one per cent to 16 million head and 14.5 million head, respectively. Some reports declare the U.S. cattle backlog cleared as of October 1, with some ongoing regional shuffling to get cattle through the system. Feeder cattle supplies outside of feedlots are estimated at 36.1 million head, down two per cent from July 2020.

Source: USDA

Beef cow inventories declined annually for the third year in a row, down two per cent from July 2020 to 31.4 million head. Beef replacement heifers were down 2.3 per cent to 4.3 million head and calf (<500 lbs.) numbers declined one per cent to 27.4 million head in 2021.

Production and grading gains

From January to September, fed cattle carcass weights were one per cent higher than 2020 and the five-year average, supporting higher total beef production and a higher proportion of Prime and AAA grade production. Steer carcass weights January through September (911 lbs.) were up six lbs. from the same period in 2020 and up 10 lbs. from the five-year average. Heifer carcass weights (840 lbs.) January through September were up five lbs. from the same period in 2020 and up 12 lbs. from the five-year average. Fed production January through September at 1.9 billion lbs. was 11 per cent higher than the same period in 2020 and 16 per cent higher than the five-year average. The production of Prime and AAA grade beef January through September was 71 per cent of all A grades, a 4.6 per cent increase from the same period in 2020 and an 11.3 per cent increase from the five-year average (63.9 per cent).

U.S. Prime and Choice production has averaged 83 per cent January through September this year, steady with 2020. While U.S. slaughter utilization has struggled to top 90 per cent each week in 2021, slaughter utilization in Canada from January through September was at 95 per cent. With ample supply of heavier cattle coming to market in Canada in the fourth quarter, it is unlikely this rate will pull back below the second-highest annual rate at 92 per cent from 2019.

Source: CBGA

Beef exports

Beef exports surge

From January to August 2021 beef exports were up 25 per cent in volume and 34 per cent in value from the same period in 2020. Exports volumes were up to all major markets, including the U.S. (+16 per cent), the EU (+31 per cent), Japan (+36 per cent), Mexico (+108 per cent), mainland China (+131 per cent), and South Korea (+91 per cent). Exports have surged ahead to Southeast Asia (excluding Taiwan) (+314 per cent) and the Middle East and North Africa or MENA (+47 per cent) from a smaller base. Declines were seen to the U.K. (-27 per cent), Hong Kong (-34 per cent), and Taiwan (-48 per cent). Total beef exports for 2021 are projected to be up 20 per cent from 2020.

Market share shakeup

The beef export market share has shuffled with fewer exports going to the U.S. and more exports headed to Mexico and Asia. The U.S. is still the major export market for Canadian beef, accounting for 69 per cent of total exports in 2021 projected versus 72.8 per cent in 2020. Exports to China are on track to double, to be the second highest since 2015.

Source: Statistics Canada, Canfax Research Services (*Projected)

Fed and non-fed cattle

Second summer for Eastern fed market premiums

Alberta fed steer prices strengthened in 2021 compared to 2020, ranging between $145-$165/cwt from January through September. Prices peaked at $163/cwt in May and June, which was $15/cwt higher than the five-year average. The third-quarter price at $154/cwt was 14 per cent higher than the same period in 2020 and 10 per cent higher than the five-year average.

Ontario fed steer prices ranged between $140-$161/cwt throughout the year and maintained a three- to four-dollar premium over the Alberta fed steer price for the third quarter. Ontario fed steer prices were at $157/cwt in the third quarter, up nine per cent from 2020 and up 14 per cent from the five-year average.

Canadian cow marketings steady to lower against rising trim price

From January through August 2021, Canadian cow marketings were down two per cent from 2020 and steady with the five-year average. This is the third consecutive year with lower beef cow marketings between January and August without any reported expansion in the July 1 beef cow inventories. From January through August 2021, Canadian cow slaughter was up one per cent from 2020 but was down three per cent from the five-year average. In 2020, when Canadian packers prioritized fed cattle, cow marketings dropped with an increased proportion headed south for slaughter. The proportion of cows being slaughtered in 2021 grew to be higher than 2020 in the second and third quarters; after five months from January to May with cow slaughter as a percent of total slaughter lower than 2020. Cow exports from January through August 2021 were down nine per cent from 2020, but up nine per cent from the five-year average. This indicates a continued reliance on U.S. packing capacity for non-fed slaughter.

From January to August 2021, cow marketings in the West were up six per cent from 2020 but steady with the five-year average. Western cow slaughter was up seven per cent and western cow exports were steady with 2020, but cow exports in 2020 and 2021 from the West were both up 26 per cent from the five-year average. From January to August 2021, cow marketings in the East were down 13 per cent from 2020 but steady with the five-year average. Cow slaughter was down 13 per cent and cow exports were down 14 per cent compared to the same period in 2020.

Trim prices have strengthened into the fall with the U.S. 85 per cent trim price up 39 per cent from September 2020 and up 41 per cent from the five-year average for September. This demand for trim should help support cow prices, with regional price spreads to determine where packers can handle the supply.

Cow prices

Cow prices found some support this spring, but drought in Canada spurred cow liquidation and pressured western cow prices in the third quarter. Alberta D1,2 cows averaged $82/cwt in the third quarter, down five per cent from 2020 and down 10 per cent from the five-year aver- age. With some late-summer recovery in pasture and crop conditions in Ontario, Ontario D1,2 cows averaged $86/cwt in the third quarter, up two per cent from 2020, and up five per cent from the five-year average. Cow prices in both the East and West are expected to move lower. In nine out of the last 10 years, cow prices have seasonally declined into November. In the last decade, Alberta and Ontario cow prices have dropped nine per cent and 12 per cent, respectively, between September and November.

Calf prices up

Alberta steer calf prices declined into the third quarter but remained higher than average. Alberta calf prices were $224/cwt in the third quarter, two per cent higher than the third quarter of 2020 and five per cent higher than the five-year average for the third quarter. Price support in the face of a larger calf crop and higher feed costs indicates strong demand from feedlots to fill pens. Calves that are marketed to perform may be commanding a premium this year due to the high cost of feed.

Ontario steer calf prices traded at a $6/cwt discount to Alberta for the third quarter, strengthening to a premium for September. The Ontario steer calf price at $218/cwt in the third quarter of 2021 was two per cent lower than the third quarter of 2020, but four per cent higher than the five-year average. In September, Ontario calf prices moved up five per cent from August to $229/cwt; the September price is three per cent higher than 2020, six per cent higher than the five-year average and a $5/cwt premium over Alberta steer calves. Calf prices may soften seasonally into November but may retain this two per cent price cushion over the five-year average due to their feed cost advantage.

Replacement ratios

The lower the replacement ratio, the fewer dollars the feed- lot must pay to replace a fed animal with a feeder; conversely, a higher ratio means the feedlot must pay more per lb. to replace those animals. Consequently, a higher ratio has negative implications on feedlot profitability as more dollars are spent placing new cattle.

Replacement ratios in Q2 and Q3 2021 were lower than in Q2 and Q3 2020. In the East, replacement ratios declined consecutively from Q1 to Q2 and Q2 to Q3 for steer calves, yearling steers, short-keep steers and heifer calves and yearlings. In the West, replacement ratios were lower in Q2 than Q1, but increased slightly into Q3 for all feeder classes except 750-lb. steers. The replacement ratio for 750-lb. steers in the West between Q2 and Q3 remained the same at 1.46.

Feed grain prices

Barley prices skyrocket

Canadian barley production in 2021 is projected to be the lowest since 2014 at 7.14 million tonnes. The low production has supported barley imports at the fourth largest on record at 150,000 tonnes. This follows the highest barley import year on record (since 1990) in 2020. Even with higher imports, 2021 would be the second consecutive year for record-low barley ending stocks and the fifth consecutive year of declining barley ending stocks. Barley ending stocks are projected to be 300,000 tonnes in 2021, their lowest levels since reporting began in 1980. La Niña drought has left field crop production down an estimated 30 per cent across Canada and down 40 per cent in the West, compared to 2020. Domestic use is projected to decline by 21 per cent from last year.

The lower supply pushed the price of barley up to a record high this August at $421/tonne. Barley prices seasonally softened into September, down $7/tonne from the August high. As a result, the Calgary cattle-to-barley ratio dropped to 16.7:1 in August, the lowest since July 2003, and increased one point to 17.6:1 for September. Spot and futures pricing have strengthened since last fall, but high cost of gain will plague margins.

Corn market correction

Opposite to barley, Canadian corn production has been trending up since the 1990s and is projected to reach an all- time high of 14.37 million tonnes for 2021. Canadian corn ending stocks have also trended up since the 1990s and are projected to be steady in 2021 compared to 2020 at two million tonnes. Total domestic use is projected to be up 16 per cent this year compared to last year.

With uncertainty in the harvest this year and the full effects of the La Niña drought unknown, Ontario corn prices surged during the summer as producers looked for alternative feeds. Ontario corn prices were $346/tonne in August but corrected to $285/tonne in September. The U.S. and Canadian corn crops have been less affected by drought than was anticipated earlier in the year. Omaha corn production was projected to be at its highest levels this year since 2004 at 23.38 million tonnes. Omaha corn has been discounted to Ontario corn since June this year but sold at a premium the last two weeks of September, leading to a Canadian feed advantage in the East.

Author: Canfax by Canadian Cattlemen

Original Article: https://www.canadiancattlemen.ca/beef-watch/beefwatch-canadian-cattle-herd-increases-strong-beef-demand-seen-from-consumers/?module=carousel&pgtype=homepage&i=3