Turmoil The reopening of the XL beef plant at Brooks is not the end of troubles for the Canadian beef industry
The past two months have seen considerable turmoil in Alberta’s beef sector because of the XL beef recall. Although there has been some relief with the JBS takeover there could still be a long way to go.
Canada’s beef sector has been influenced by a number of factors:
- Grass. Western Canada’s cow-calf sector grew because of an abundance of prairie grass and water. The feedlot and packing sectors developed close to the cattle.
- Overabundance of feed grains. The Crow rate subsidized movement of grains to Eastern Canada until it was eliminated in 1995. The feeding industry in southern Alberta flourished with this policy change.
- The dollar. There is a strong correlation between the exchange rate and cattle prices. In January, 2002 the loonie dropped to 62 cents U.S. compared to parity today. Historically, for every one per cent change in the exchange rate, cattle prices move by a little over one per cent in the opposite direction.
- BSE was devastating to the sector, with losses calculated at $7 billion. The industry still feels the effects.
- Rethinking of Canadian government agriculture policy and support. The Canadian government has in the past been prepared to assist food production as a way to sustain the country’s food supply. It is less concerned these days about food security, evident with the changes to Growing Forward 2.
- Reduced Canadian and Alberta beef cow numbers. The beef cow herd has decreased in 2012 by 24 per cent since the high of two million head in 2005. This number equals the cow inventory in 1993.
- U.S. drought. Corn production is projected to be about 13 per cent less than it was for 2011 with the lowest production since 2006. Pasture acres have been affected dramatically.
- Barley acreage and prices. In 2012 barley acres in Alberta decreased by over 20 per cent compared with five years ago. Feed barley prices in Lethbridge have gone from $165 to $270 per tonne, an increase of over 60 per cent. This reduces the price for feeder cattle.
- Resurgence of risk. The most relevant risk is margin risk, not price risk. At the same time, conventional tools to manage operation risk are becoming less effective.
- Growth, consolidation and structural change. During the past 20 years Lakeside Farm Industries has been through several ownership changes. Mitsubishi, Iowa Beef Producers, Tyson and Nilsson brothers were all involved before JBS.
Two beef packers now own 80 per cent of Canada’s processing; two plants process 70 per cent of Canada’s beef. Recently because of low cattle numbers these plants have been running at 70 per cent capacity. There are problems with plant staffing, with packers relying on foreign workers. This is not exactly optimistic.
Purdue University economist Michael Boehlje has assessed how North American agriculture trends are affecting Western Canada. He cautioned that “unanticipated surprises” could dramatically alter the industry. Some of this would be the effects of consolidation and concentration along the entire value chain.
The pivotal part of Canada’s beef sector is now controlled by head offices in Minnesota and Brazil. They are controlling the future of the Canadian beef business: Canada has become a branch office. They run multinational businesses that compete with Canadian product and distribution.
To some, involvement of JBS is a godsend ensuring fed cattle can be sold on a local market and feeder prices will be partway reasonable. However, the long-term positioning of Canadian producers needs to be discussed now, not six months from now.
What will happen next year when the four big packers, including JBS, 30 per cent of which is owned by Brazil’s government, and Cargill in the U.S. begin downsizing, as projected, because of the drought? How will this affect the Canadian packing, feeding and cow-calf sectors?
As in the past, significant vertical supply chain functions will return to more open-market arrangements with tight strategic alliances between buyers and sellers. More Canadian feeder cattle could be shipped south to American feedlots and more fed cattle could be shipped south to American packers to buoy their lines. And there could be fewer Canadian feedlots and packers able to compete in this market arena.