Alberta feeder cattle imports have exploded, reaching highs not seen since the early 2000s.
But feedlot operators are still struggling to turn a profit, and adding to their woes, the surge in American cattle may soon slow.
“We were barely importing any feeders four or five years ago,” said Brian Perillat, manager of Canfax. “We went from 15,000 to 20,000 head a year to about 260,000 in the last couple years of importing feeders, mostly into Western Canada.
“There’s been phenomenal growth here.”
It’s also a dramatic change.
Historically, Alberta has been a net exporter of feeder cattle, but since 2015, the U.S. cow herd has grown significantly with the addition of more than two million cows while Canada’s herd has continued to shrink.
At the same time, packing capacity in the States has shrunk while Canada’s has grown — and that means more cattle coming into Western Canada.
“As their cattle herd grew, their packing capacity has been at a bit of a bottleneck in terms of working through all the cattle supplies they have, whereas in Western Canada, we’ve seen a little bit of an expansion,” said Perillat.
“The two major plants have increased their throughput a little bit, and then we added Harmony Beef at Balzac as well. Basically, you’re going to attract the cattle closer to the packing capacity, just driven by our strong basis.”
Canadian fed cattle prices have typically been at a discount to the U.S. market, but as these imports have grown, fed cattle prices have risen.
“There’s been quite a bit of time where Alberta has had the strongest fed cattle prices in North America, so we’ve attracted the cattle that way.”
The strength of the Canadian dollar doesn’t have the impact on imports some might think, he added.
“We still hear from time to time that a weak Canadian dollar is going to mean all of our cattle go south, but actually, historically we’ve seen the opposite,” said Perillat. “If you look at the early 2000s at the last time we were importing large numbers of feeders, the dollar was very weak.
“The dollar really just influences the prices. It doesn’t impact the flow of cattle.”
And as a result, Alberta saw the largest first-quarter cattle slaughter in 15 years at the start of this year and packers have been working “full out.”
“They have had good margins for the last few years,” said Perillat. “They’ll be okay even if numbers do shrink somewhat. It would take a pretty significant shift in these cattle supplies to risk anything to the packing sector.”
That’s driven feedlot expansion, he added.
“Our feedlot sector was generally declining because of a lack of profitability and the cattle numbers shrinking overall post-BSE,” he said. “But when these basis levels increased, we’ve seen pretty big growth in the feedlot sector, too.”
But if the steady supply of feeder cattle starts to shrink — and Perillat expects it will — feedlot operators may continue to struggle with ever-tighter margins.
“Basically, the U.S. herd stopped expanding a couple years ago and now they’re actually starting to decline as well. So those numbers are going to tighten,” he said. “Feedlot expansion is probably going to slow down or stall right out.”
‘Excess of bunk capacity’
While there are some large feedlots just starting to fill this year for the first time — and others in the process of being built — that slowdown is already happening for many Alberta feedlot operators.
“It’s certainly been harder for us,” said Keith Gregory, operations manager at Cattleland Feedyards, a 25,000-head operation near Strathmore.
“Some feedlots have expanded and new feedlots have been built, but our numbers certainly don’t encourage expansion.
“Right now, I think there’s an excess of bunk capacity and there just isn’t the supply of feeders to fill those at a reasonable price.”
The main problem, he said, is that the price of feeder cattle is too high relative to the price of finished cattle. And while feeder prices may increase in the short term, “in the long term, they will probably settle back to where they are today.”
“They’re trying to source their feeders any way they can to find them cheaper, but part of the problem is that the price of the feeders up here doesn’t really allow the ranchers or the producers the option to expand,” said Gregory.
“They’re not making enough money to expand their herds. So we’re kind of stuck between a rock and a hard place right now.”
The contraction of the U.S. herd will also impact prices.
“If that herd contracts at a faster pace, those prices they’re paying in the northern states just aren’t going to work anymore,” he said. “The market factors can change in a heartbeat.”
Feed costs are also putting pressure on feedlot operators. Canada usually has a feed cost disadvantage compared to the United States, and that hasn’t changed.
“Historically, cattle moved to the feed — wherever the cheapest feed was, that’s where the cattle moved to,” said Perillat. “But despite Western Canada having a feed cost disadvantage, we still were bringing cattle north.
“As we sit here today, it’s hard to say — given how volatile these grain markets are — whether Western Canada is going to move back to a feed cost advantage or stay at a disadvantage.”
Prices for feed wheat, barley, and corn have “skyrocketed,” said Gregory.
“It’s making already very tight margins very negative. That’s been a challenge,” he said. “I would expect it to be extremely challenging for (new feedlot operators) right now even to source the amount of barley required and to do it at a cheap enough price to make feeders work at these prices.
“I can’t see them turning a profit on it right now.”
And if the U.S. herd numbers continue to shrink, the screws will be turned even tighter.
“We’ll be competing with U.S. feedlots more aggressively, and if they continue to have a feed cost advantage, that makes it that much harder for western Canadian feedlots,” said Perillat.
Given the last five years of low profits and the challenging outlook, more cattle feeders may exit the business.
“It’s happened across all agriculture sectors — we see more consolidation,” said Perillat. “We’ve lost some feedlot producers. We’ve seen mergers. We’ve seen large feedlots buy out smaller feedlots.
“Feedlots have not been profitable for the last three years, so we may see some smaller guys get out or utilization rates drop. That’s the risk.”
“The last five years, it’s been extremely challenging to make any kind of a positive margin feeding cattle,” he said. “The prices just don’t work when you’re buying feeder cattle and paying too much relative to the price of fats.
“There are just less and less cattle feeders out there. There isn’t an opportunity to make money feeding cattle.”