Good times gone in a flash for cattle sector

Cash-to-cash basis is one 
of the lone bright spots, 
but that too could vanish 
if Trump White House brings back COOL

Anne Wasko has had a knot in her stomach since Donald Trump’s unexpected victory in the U.S. presidential election.

Anne Wasko

Anne Wasko
photo: Supplied

“I’m certainly hopeful, but the one thing that makes me nervous at any time is uncertainty,” said Wasko, marketing analyst with Gateway Livestock Marketing.

“It’s way too early to jump to conclusions, but the fact is, we’ve still got this uncertainty about some of the things he said back in the campaign — especially on the trade front, because trade is so important to us.

“We’ve seen lots of U.S. presidential campaigns over the years where things are talked about during the heat of a campaign that are suddenly gone after inauguration day… but we can’t be ignorant to the fact that the rules have changed.”

Trump took swipes at both the North American Free Trade Agreement and the Trans-Pacific Partnership during his campaign, saying he would pull out of the former and wouldn’t ratify the latter if elected. But according to a transition memo obtained by CNN following the Nov. 8 election, Trump’s advisers have also pinpointed country-of-origin labelling (COOL) as one area for reform, and that could lead to wider basis levels and even greater market volatility for Canadian cattle producers.

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“We’ve had one of the strongest basis environments in recent history in 2016,” Wasko said at a Battle River Research Group seminar here last month.

“Even though we do not like our prices today, thank goodness our basis is as close to the U.S. market as we’ve been in years.”

So far this year, the cash-to-cash basis (which compares Nebraska prices to Alberta ones after exchange is taken into account) has averaged about -$6.50/cwt for fed cattle, said Wasko. That compares to -$11 to -$15/cwt from 2012-14 when COOL was in place.

That gap becomes “more exaggerated” when passed along to the feeder market.

This year’s feeder cattle basis has averaged around -$9/cwt, whereas it ranged from -$14 to -$27/cwt between 2012 and 2014.

“We saw some real extreme basis levels back in that day,” said Wasko. “You can’t hang it all on COOL, but certainly a portion would have been because of COOL.”

And history could wind up repeating itself if Trump revisits COOL, she added.

“COOL created extra distance from the U.S. because of all the extra cost. COOL had huge negative impacts on basis levels for feeder cattle and fat cattle.”

That’s the last thing Alberta cattle producers need right now, she said.

“I think we knew we were coming into a cycle, but I don’t think any of us — myself included — thought we would go as high as we did or come off as fast as we did.”

Alberta fed cattle prices have seen a 36 per cent drop from the peak in the spring of 2015, while calf prices have plunged 50 per cent from their peak.

“We knew this cycle would be at a higher price level, but certainly, the spike up and then the spike down was not what we would call a typical cycle,” she said. “This has been a tough go.”

A 10-year wait?

And the sharp drop in prices has stalled Canadian cattle herd expansion, she said, adding that the Canadian herd numbers “haven’t really changed” in the past year.

“If you think about our peak herd after BSE, when we got up to about 5.5 million beef cows in the country, we’re now down about 1.5 million from that number, at 3.8 million cows to start off this past year,” said Wasko.

“When Stats Canada comes out with our January 2017 numbers, I don’t think they’re going to be much different.”

There was “a bit of a retention” last year, but that’s probably it for now.

“It was the one-year wonder — we did keep some extra heifers in 2015, but I don’t think it was enough to grow the size of our herd,” said Wasko.

In contrast, the U.S. cattle herd as grown “significantly” since drought in 2011 and 2012 forced producers to slash herd numbers.

“They got to a bottom of 29 million beef cows in 2014, and since then, conditions have been perfect as far as moisture conditions and pasture conditions,” said Wasko. “And with record prices in the U.S. as well, it’s been an absolutely perfect environment for those who sold off cows in the drought to bring them right on back again.

“Since the bottom of that cycle in 2014, they’ve already added more than two million head.”

And even sharply lower prices won’t immediately slow that freight train — Wasko expects the U.S. herd to grow by another 700,000 next year.

Canadian producers likely won’t be so lucky after “a decade of unprofitability,” she said.

“When 2014 and 2015 came, profitability was great — but it was the first time most everybody in the cow business had seen any money in a long, long time,” said Wasko, adding the extra profits were used for things such as rebuilding infrastructure on ranches and repairing battered balance sheets.

“So now prices are coming back down again faster than we were hoping, and it would be hard to stand here today and say, ‘Rah, rah, rah, guys, we’re going to grow the herd.’

“Cattle prices are already down again. We missed the cycle.”

But Wasko isn’t prepared to say that the Canadian cattle herd is never going to grow again.

“Hopefully, we’re in a better place by the time the next opportunity for the next cattle cycle comes in — but history says those are 10 years apart,” said Wasko.

“The cattle cycle has always been about timing, but we are going to go through a period of lower prices. That needs to be part of the game plan if you’re planning to grow your herd at this time.”

That’s especially true for young farmers just breaking into the business.

“With the environment today, with the volatility that’s out there, we need to be using price risk management,” said Wasko, pointing to things such as the Livestock Price Insurance Program, as well as futures and options, as ways to manage price risk.

“There’s too many things outside of what we can control, and young producers can’t weather those kinds of negative hits.

“I wouldn’t dive into this business without some kind of risk management process.”

About the author

Reporter

Jennifer Blair is a Red Deer-based reporter with a post-secondary education in professional writing and nearly 10 years of experience in corporate communications, policy development, and journalism. She's spent half of her career telling stories about an industry she loves for an audience she admires--the farmers who work every day to build a better agriculture industry in Alberta.

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