Canadian cattle prices are headed for a downturn and they’re going to stay on the low side for the next two years.
“The wheels are coming off the bus,” said Anne Wasko, market analyst with Gateway Livestock.
The downturn is partially due to the recent increase of the Canadian dollar.
“This isn’t a slow progression — it’s an instant progression with a very large impact,” said Wasko. “We have lower cattle prices in the United States, we have a higher Canadian dollar, and we have a weakening basis; three negative impacts that have all come into play in a very short period of time, with a very limited time to respond and react.”
Feeders and backgrounders now have an inventory that is losing money and cow-calf producers are looking at a very different scenario compared to a year ago.
The risk around the dollar probably could have been mitigated, but things changed so quickly that most producers were caught off guard, said Wasko.
“I just look at the banks and the banks haven’t even called it right, so I don’t know how producers would,” she said. “The point I try to make to producers is that this is a very quickly changing marketplace. Our calves are being born today, but we’ve got a lot of moving pieces between now and the time we wean those cattle in the fall.”
Things have been slowing down since 2015, but the Canadian industry was buffered from the effects due to the declining dollar.
The cattle price cycle peaked in 2014-15 and the American herd liquidated after the severe drought of 2012. Prices have gone down since 2015 because there has been more cattle and beef available.
The 2015 basis was strong, which meant Canadian prices were closer to the American price.
“This happened because the Canadian packers wanted to send the message to keep Canadian cattle in Canada,” said Wasko.
According to CANFAX, as of April 1, 2016, there were seven per cent more cattle on feed than last year in Alberta and Saskatchewan. Basis levels are currently returning to normal levels.
The U.S. has expanded for the last two years and is up four per cent, while the Albertan herd has remained stable since 2012 and might not expand this year. And these cattle numbers won’t help Canadian producers when price correction comes because American cattle drive the market. Producers will likely see a market that is turned upside down, and prices will be lower, even though the herd is smaller, she said.
Jason Wood, provincial livestock analyst with Alberta Agriculture and Forestry, is a little more optimistic than Wasko.
“The prices are stabilizing and prices for feeders and fed stock are still above the five-year average,” he said. “Overall, prices are still quite good compared to the five-year average.”
Right now, it doesn’t look as though the prices will drop any further, he said.
“If you look at the futures market, it looks like it’s fairly stable through the remainder of the year, but that’s open to a lot of ‘what-ifs’ in there,” he said.
He’s not sure if the herd will expand because more heifers were going to feedlots in March.
“With those heifers going into feedlots, that reduces the likelihood of breeding stock being retained and reduces the likelihood of herd expansion,” said Wood. “This could be a one-off event and we’re still early in the year. There’s still a lot of time to go.”
Last year there was a push to expand the cattle herd, but the expansion never happened because of drought. But Wood said cattle sell-offs during this time were smaller than expected.
“We’re still seeing margins in the cow-calf sector that are quite good,” he said. “We’re still early in the year, so we could see moisture conditions improve. As we move forward, we’ll have to see what happens.”