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Building the herd: The downside of strong cattle prices

Cattle prices are expected to remain strong into 2016, but what does that mean 
for replacement cattle next year?


Next year could see continued strong or even stronger cattle prices — and that’s a double-edged sword for producers who’ve reduced their herds this year and plan to buy replacements in 2016.

Producers in prescribed drought regions who have reduced their breeding stock by at least 15 per cent can tap into the Federal Livestock Tax Deferral program. The idea is to replace cattle next year, but StatsCan’s latest estimate has Alberta beef cattle numbers down 4.4 per cent and heifer retention is down 1.6 per cent as of July 1.

And those numbers have fallen since then, said Ted Nibourg, business management specialist with Alberta Agriculture and Forestry.

Ted Nibourg

Ted Nibourg
photo: Supplied

“Those cows are not going to be available for purchase next year,” said Nibourg. “If there’s a wholesale subscription to the deferral program, there’s going to be a lot of people looking for replacement cows or they’re going to have to pay the tax. The thing is: Does it become economically viable to stay in the cow business?”

The severity of that dilemma may ultimately come down to Mother Nature.

Recent moisture throughout Alberta has eased the situation, said Brian Perillat, manager and senior analyst with Canfax.

“It seems the drought cycle has kind of broken and we’ve seen some pretty good moisture coverage in a lot of areas,” he said in an interview in late August.

“It looks like they may be able to weather the storm better than they did just a month ago.

“The high calf prices overall more than offset the rise in feed prices so cow-calf producers are still going to be profitable, maybe not as profitable as they would have liked but compared to the past couple of decades it’s still going to be one of the more profitable years for cow-calf producers.”

Feed factor

There is some room for optimism, particularly when it comes to feed price and availability, said Coronation-area rancher Tim Smith.

“No doubt there was a big shortage on the hay side and a lot of producers feed only hay. However, I think the alternative feeds are starting to come in at higher volumes,” he said. “We’re seeing green pastures again in certain areas. Some areas are still suffering badly, but in some pockets we’ve seen some relief and we’re not really that short of moisture.”

Feed prices are more of an issue right now than availability, said Smith, who predicts sellers will eventually drop their prices, which are rumoured to have hit as much as $300 a tonne during the worst of the drought.

“With the better cattle prices everybody seems to think the rancher can bear a little more cost,” said Smith. “My prediction is there will be more alternative feed sold but it will just be sold later in the year. People who are trying to get that extremely high dollar from producers will in the end find it hard to sell for that much money and sell for less.”

Producers should also continue to see strong cattle prices, said Perillat.

“The No. 1 driver of beef demand is wealth,” said Perillat. “Consumers in poorer countries tend to spend more on non-meat. In some of the developing countries they look to pork and poultry and as wealth grows they add more beef to their diets. ”

Another major reason is that there are simply fewer producers growing cattle.

The overall Canadian herd stands at a 23-year low of 13.7 million head, down about five per cent from 2010 and down almost 25 per cent from the peak of nearly 17 million head in 2005 (although that figure was partly distorted by BSE and the closed border).

It’s no surprise many producers left the business when prices finally rebounded, said Nibourg.

“We have an older generation of cowmen, 55- to 60-year-old range,” he said. “All of a sudden they have cows that are worth anywhere from $2,500 to $3,500 which is a far cry from the $500 they had a few years ago.

“They think now’s the time to get out. They faced 15 years of bad prices, BSE, border closures, stuff like that. It’s the potential revenue side that’s triggering liquidation.”

Looking ahead

Better moisture next year may result in some modest growth of the Canadian herd, said Perillat. “We’ve had drought up here but the U.S. has had very good moisture and is showing signs of expansion. If demand keeps growing along with very modest beef supply growth it should bode well for cattle prices.”

A weak dollar is also supportive, but don’t expect any additional price surge, he added.

“Most of the price rise has already occurred and if anything there could be some pressure on prices.”

Still, rebuilding the herd is going to be an expensive proposition.

That’s why producers should be seeking the advice of a financial adviser, said Nibourg. They should also make use of online tools at www.agriculture.alberta.ca (look under the Decision Making Tools tab).

“AAF has a number of calculators on its website that allow you to determine what you can afford to pay for cows based on a five-year projection of what calf prices are going to be,” said Nibourg. “By factoring in expenses you can come up with a pretty accurate figure for what you can afford to pay.

“That will be your baseline. If you start paying more than that because there’s a greater demand, you have to ask yourself if it makes economic sense.”

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