Next year could be the worst of times or the best of times for the North American beef industry, depending on the sector.
The cow-calf sector may enjoy record prices, but ongoing drought in the United States and escalating feed grain prices could drive other sectors further into the red.
Calf prices could hit record levels next year, said Duane Lenz, market analyst with Cattlefax based in Denver, Colorado.
“We look for record high prices next year. That could be the cyclical top,” he said at the Canfax market forum in Calgary Nov. 14.
“Cattle prices cannot continue to go up forever. At some point gravity will take hold.”
To get stronger calf prices would require a break in the U.S. drought. Pastures must recover to give producers confidence to buy calves.
Cattlefax expects 550 pound steers to average $185 per hundredweight next year, exceeding this year’s average of $168. Feeders weighing 750 lb. could go as high as $160 per cwt. with an average for the year of $147.
Finished cattle prices could be higher than $130 per cwt., which would be a record and likely short lived. Fed cattle averaged $95 per cwt. in 2010.
However, corn prices could average $6.20 per bushel next year with peaks a dollar higher.
Feedlots will suffer as feed supplies tighten and competition grows for a small calf supply. American feedlots already have too many open pens and are losing about $150 per head.
“We will start to lose some yards, unfortunately,” he said.
Packers may close because they also face excess capacity and large losses. Some wondered if XL Foods in Brooks, Alta., would be the next casualty, but JBS-USA taking over its management means it is likely to survive.
It is becoming increasingly difficult to predict prices because only 30 percent of U.S. cattle are now traded on the cash market. The rest are sold on contract or managed through alternative marketing agreements.
As well, record prices do not guarantee profits. Industry players must find ways to protect themselves against this risk and volatility, said Canfax manager Brian Perillat.
Canadian markets reflect what happens in the U.S., but Perillat said prices here are not likely to be as high because of a wide basis that has dogged the business all year.
Finished cattle prices were mostly flat this year with no spring rally. The last strong year was 2001, when fed cattle fetched $121 per cwt.
Markets were volatile with fed cattle prices moving as much as $40 per head from one day to the next.
There is 30 percent excess capacity in western Canadian feedlots, where losses hit as much as $200 per head.
The basis spread between Alberta and Nebraska cash prices has been wider than normal and can cost Canadians up to $50 per head.
Perillat predicts an average of $122 per cwt. for fed cattle in Canada next year, assuming a par dollar with average basis levels. Summer lows will be $110 to $115.
Calves 550 pounds averaged $151 per cwt. this year and there could still be a record price in November once the final numbers are crunched.
Cow prices are strengthening. XL Foods processed a lot of cows so its closure drove down prices this fall.
XL Foods’ closure because of E. coli contamination forced producers to find alternative markets for their cattle. Cargill Meat Solutions at High River, Alta., increased its kill capacity and more cattle went to the U.S.
Fed cattle exports reached 16,000 per week in October while XL Foods was closed, up from a normal 4,000.
Perillat said the signals are encouraging cow-calf producers to start expanding, but that may not be evident until 2015.
Canada lost a quarter of its herd in the last seven years, but there was a small uptick in cow numbers in the last inventory report. A few more heifers were retained, but the population remains flat.
“It is critical that our industry starts to turn this corner,” he said.
Producers remain cautious because profits have been elusive.
In the U.S., expansion depends on the drought ending. Producers may consider expansion if there is water and grass next year, but cow slaughter will go up if it is another dry year.
“If we come into another year of drought, that cow slaughter will be different because we have nowhere to go with cows. They will have to come to town to be slaughtered,” he said.
However, Perillat anticipates profitability in the cow-calf sector and thinks producers would consider keeping heifers for breeding, not slaughter, if conditions are good.
There were 35.5 million cows in the U.S. in 1996. That has since dropped to 29.7 million.
However, carcass weights are growing , making up for fewer cows.
The average carcass will be 833 lb. next year compared to 670 lb. in 1980 because of more productive cows and growth promotants.
“Increasing weights offset 75 percent of the declining cow herd over the last 20 years,” Lenz said.