In the past few weeks, I have been asked to give several presentations on the state of the beef industry a report card, so to speak, on how we are doing within both the global arena and the domestic market.
What I have to say may surprise you.
The beef industry in Canada is not growing and is in fact retracting at a very fast pace. The lack of retention of females cannot replace the cull cows and we most certainly will not have significant retention in the next 12 months. Attractive prices have prompted long-term players in the industry to exit. Many of their mother cows, who could still contribute to the Canadian herd, are being purchased by packers who need them to fill their rail hooks. Some of the potential breeding stock is going down a terminal road, further eroding our opportunity for inventory growth.
Bred cattle and pairs are trading all over the map indicating some uncertainty in the future. This is an opportunity for new entrants and for those wishing to expand. If a 600-pound calf sells for $1.60 cwt. and his mother for $0.70 cwt. at 1,400 pounds, that is a total of $1,940. When a decent pair can be bought for $1,350 there is an opportunity. The trick is to remain disciplined when buying.
Packers in Canada have kept themselves in the black through extreme discipline. They leave as little to the cash market as they can, preferring to ensure an adequate kill through contract buying. The cows that come on the kill floor help to take the pressure off of the cost of running empty hooks. Collectively, this keeps a lid on fed cash cattle pricing.
The pressure on fed cattle is also magnified by the lack of export interest of Canadian live cattle into the U.S. In other words, our inability to aggressively cash in on U.S. fed cattle prices is keeping the price of fed cattle down. This is expressed in the current wide basis.
This situation is risky as the U.S. moves from a net importer to a net exporter of beef. It has and will continue to push beef into Canada. In August, over one-third of the 57.7 per cent increase in beef exports from the U.S. found a home in Canada.
Despite the current high prices, the margins continue to be slim in cattle feeding and in beef. The volatility and overall strength of the Canadian dollar does not make us attractive trading partners and feeder cattle also have stopped flowing into the U.S. The recent Cattle on Feed reports indicate that from the American side, the increase in cattle on feed and in placements will keep Americans subdued in regards to buying feeder cattle. In Canada, lower placements and cattle on feed has generated good interest in calves. The profit on the fed side is uncertain however and many of these calves are placed at a loss if the risk has not been mitigated or if the cost of gain increases.
Most grain farmers I have spoken to see the demise of the Canadian Wheat Board monopoly as positive and expect higher grain prices. We have yet to see how that will unfold, but there is little room in the cattle business for higher feed prices.
The volatility of the live cattle futures, the board on which all cattle prices are established, has left even the most sophisticated trader frustrated. We do not, despite the press in favour of higher prices, have any sound fundamentals to indicate this will be a certainty in the year 2011. We may however, enjoy a robust second half of 2012, if we do not experience a global financial collapse.
There is most certainly opportunity on the cow-calf side and we have been encouraging our clients to expand or begin cow herds for several years. For fed cattle, the secret will be in the use of strategic risk management and in owning cows. Paying out of the money on feeder cattle inventory on speculation that cash prices will go up has caused many a gray hair. Along with this, it is the right time in history to implement new technology into the development of origin-traced beef. At this point, independent industry is years ahead of government and industry groups in their development of sophisticated cattle health, movement and risk-management software, use of new technology and application of genomics. That is to our advantage.
As we move toward a transparent world, animal welfare will be the deal-breaker. We know that from an international perspective, it is to be included in all international trade agreements. Companies, farms, schools, feedlots, research stations, packers and all those who handle cattle should be trained and certified and practising sound animal welfare. Change will come from the public through retailers who respond to buyer demand. For this we must be proactive in our thinking and in our practices because a failing grade on animal welfare could erase our future opportunity. To maintain our markets in the beef industry, we are encouraged to look at it from the public s point of view and not from the desk in which we are securely seated.
BrendaSchoeppisamarketanalystandtheownerandauthorofBEEFLINKTM,anationalbeefcattlemarketnewsletter.Aprofessionalspeakerandindustrymarketandresearchconsultant,sheranchesnearRimbey,Alberta.brenda. [email protected]
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