A low dollar means double trouble for Alberta’s big packers — and puts stress on feedlots, too.
“In 2015, with smaller cattle numbers and bigger exports, we’re going to see some pressure on our packing plants and feedlots to stay better utilized,” said Brian Perillat, senior analyst and manager with CanFax.
Despite its shrinking herd, Canada still exported over a million cattle in 2014, putting more pressure on Cargill’s High River plant and JBS’s Brooks facility, which are both running well below capacity.
“The projection right now is that both packers in the country are not doing all that well because of throughput dynamics,” said Fred Hays, policy analyst with Alberta Beef Producers.
“There are two things working against (the packers) — the costs that they’re paying for cattle and the numbers that are going through their system. That’s pulling down potential profitability.”
“We want to be as competitive as we can to keep the cattle here,” added Perillat. “It would be better to keep the cattle fed and processed in Canada. Seeing a lot of them go south is a bit concerning.”
A bigger herd would help, but heifer retention has yet to climb significantly, with cow-calf producers opting to repair a balance sheet ravaged by years of low prices and high costs.
“It’s starting to turn around, but they’re projecting now that it will be into 2016 before we’ll see any upward trend in the herd,” said Hays.
Need to compete
And it’s not just a problem for packers, as losing one of the two Alberta plants — which together account for more than 80 per cent of the country’s processing capacity — would be a disaster for the entire beef sector.
“We have processing capacity in Canada that we are not using,” said Rich Smith, executive director of Alberta Beef Producers.
“We need to make sure that we do whatever we can to ensure that the processing sector in Alberta is competitive with the U.S., so they can compete with U.S. buyers for Canadian cattle.”
Part of the competitive equation is the greater regulatory burden in Canada and a shortage of workers, something the beef industry has been trying to address, even before the dollar took a dive, said Smith.
The low Canadian dollar helps offset those higher costs, but the flip side is that Canadian cattle are now cheaper in U.S. dollars, and that ups the competition from south of the border.
That’s OK as long as it doesn’t go on too long, said Smith.
“The reduced value of the Canadian dollar helps sell exports, which in the short term, helps create more benefit than harm for cattle sales,” he said.
Calf and fed cattle prices — which went up 40 to 60 per cent last year — has many in the industry worried about push-back from consumers, who have cheaper protein options in poultry and pork.
The high cost of cattle is also a concern for feeders, and they also have to deal with negative impacts from a low dollar. U.S. corn and DDGs are more expensive and that props up feed grain values here, which hurts margins for feedlots.
“They came off a great year in 2014, but going forward, they’re going to see some pressure because of greater competition out of the U.S. and less cattle around,” said Perillat.
About 70 per cent of the Canadian feedlot industry is located in Alberta.
“These people will have to compete with each other and with the U.S. on purchasing calves,” said Hays. “Their expenses are going to be higher. They’re going to have to market into a marketplace which is fairly competitive. Their opportunities are not as good, but they’re still good.”
On the sales side, the low dollar makes for a mixed bag — there’s a good market for finished cattle in the U.S., but American feeders are aggressively bidding for feeder cattle here. That is “putting limitations on feedlot size for getting numbers,” said Hays.
As with the packers, the big issue for feedlots is making productive use of their infrastructure. The more cattle you put through a packing plant or feedlot, the lower the fixed cost per animal.
Most of the time, feedlots operate at a 70 to 80 per cent fill capacity, with overhead costs that include maintaining a facility and a staff, said Hays.
Once utilization slips down to 60 per cent, feeders can feel serious cash flow pain and that, in turn, reduces their capacity to bid for cattle — which can start a downward spiral. Once a feedlot is down to 50 per cent capacity, said Hays, it’s tough to keep the doors open.
That’s exactly what happened in 2007 when many feedlots across the country closed, he said.
“Feedlots need a high throughput coming through,” said Hays. “If things continue the same way, their margins will be reduced. Smaller feedlots cannot be as competitive as larger ones, so the smaller ones tend to shut down.”