It is not until heifers are pulled out of the slaughter mix and retained for breeding that there is a drop in beef supply.
Food news headlines around the world talk about the growing need for more food, including beef, due to population growth. In the past decade the price of the global food basket has increased by 69 per cent and beef cow inventory has diminished. Many analysts talk about global demand for beef outstripping supply and forecast for beef prices to increase. Yet, among all this positive news, the value of Canadian commodity beef continues to decline.
The value of beef in Canada as a commodity has been diminishing for over a decade. Our codependency on the United States is partly to blame as we service this market with more than 50 per cent of our live sales and over 80 per cent of our export beef. On the live cattle side, we continue to sell to the United States at a discount. That discount is part currency and part basis, which in many cases far exceeds the price of delivery of the cattle to a U.S. point of slaughter. Whenever the basis is wider than the actual cost of delivery and grading, we sell at discount to the U.S. price.
The value of the Canadian dollar plays a big role in cattle price and beef value as it is tied to American currency. The lower the Canadian dollar, the greater the value of beef at home. For years, the Canadian beef industry leaned on the lower dollar to stay in the black.
Glenn Hodgson, chief economist for the Conference Board of Canada, reminds us that we can no longer rely on low currency for international competitiveness. As the dollar goes up, that makes Canada a great place to sell beef into. This is evident in the dramatic increase in beef imports from the U.S. in 2009 and year-to-date drop in exports by 22 per cent. It is going to take energy and innovation to be internationally competitive and increase beef sales.
Without increased market access, our dependency on fluctuations in the U.S. dollar and the U.S. beef cattle market will hold us victim. Canada is especially fragile as she hosts just 1.3 per cent of the world inventory but exports 2.3 per cent of the beef volume. Almost 96 per cent of Canadian beef is consumed in North America. Per capita consumption in Canada and the U.S. is now at its lowest level since 1960 and the demand picture is not strong.
Unemployment plagues both Canada and the U.S. and our economic vitality at home is deeply tied to our ability to export. With the current European financial crisis, all exports have slowed as the world takes a wait-and-see approach. We need high-end markets to offset the wholesale and discount retail battle for beef at home and bring value to the product.
Closer to your farm gate, it is important to remember that a drop in domestic inventory does not mean a decrease in beef production or supply. It is premature to assume that a lower cow inventory equates to less beef. As inventory decreases, those animals are eliminated via the slaughter system and often increase the near-term supply of beef on hand. It is not until heifers are pulled out of the slaughter mix and retained for breeding that there is a drop in beef supply.
Even with a reduction in slaughter, as was the case in 2009, that in itself did not reduce beef production. Carcass weights continue to increase and add volume to the beef pipeline. Although it is true that we are at our lowest level of cow inventory since the 1950s, beef production has continuously increased because of improved genetics, feed and efficiencies within the cow-calf herd and growth and yield enhancements in the feeding programs.
It is fair to say that we still have a situation where supply outstrips demand. Although the headlines will tell you that the demand will outstrip supply, we are simply not there yet. It is important to read between the lines regarding beef supply and demand. There are many opportunities within the beef industry but we first must adjust the business to the reality of a higher Canadian dollar and aggressively secure other markets. When we do these things and start to retain heifers for breeding, then and only then, could commodity value for Canadian beef increase.
Brenda Schoepp is a market analyst and the owner and author of Beeflink, a national beef cattle market newsletter. A professional speaker and industry market and research consultant, she ranches near Rimbey, Alberta.[email protected]