AHEAD OF THE HEARD -- There is a rule of thumb in market economics that higher prices result in more supply, and that’s usually also true with cattle marketing. But nowadays, cattle cycles seem to have a life of their own. A case in point is the growth, or rather lack of growth, of the Canadian beef herd. Unlike the American herd, which has seen significant expansion in the last two years, its Canadian counterpart has stalled in any expansion. Recent statistics show that there has been some increase in heifer retention but that has been offset by an increase in cow slaughter.
The usual pattern is that higher cattle prices result in producers holding back heifers to increase production. That seemed to have happened in the United States during the run-up in higher prices over the past two years but in Canada, cattle producers seemed to have been selling every calf they could during that same time. It causes one to ponder – have cattlemen up here upset the old cattle marketing adage about “buying high and selling low?” If that is proven to be true we could see the Canadian herd expand as cattle prices continue to decline over the coming year. Clearly, considering last year’s sky-high prices, buying or keeping replacement stock was indeed a very costly exercise. Perhaps after 150 years one might wonder – have Canadian cattle producers seen the light and changed some bad marketing and production habits? There must be more to the story.
Some industry commentators have tried to attribute a number of factors to the reluctance of Canadian producers to expand their herds. Some claim that it is due to an overall lack of confidence in market access and security. There is some truth to that – the Bovine spongiform encephalopathy (BSE) outbreak back in 2003 and its devastating impact on the entire cattle and beef industry in this country had a lingering psychological influence on the marketing security mindset of producers.
But that was 13 years ago; surely that is all behind the industry. Since then the Canadian Cattlemen’s Association has worked diligently to see any remaining roadblocks to Canadian beef imports eliminated. I expect the battle against American COOL legislation also impacted confidence in the cattle free-market process. On the other hand the very high prices of the last two years took the sting out of that unfortunate market restriction situation. Maybe Canadian producers have become more fatalistic and no longer believe in the market or the promises of better days, the point being “sell while you can,” as market calamities like BSE and border restrictions are just one day away from blowing the market out of the water.
As one might expect, the cattle herd expansion stagnation has affected the cattle feedlot sector. They will inevitably be faced with fewer feeder cattle being made available. Their situation is going to be made even worse by repercussions from the repeal of United States’ COOL legislation. It’s one of those perverse consequences – it’s good for cow-calf producers but not so good for feedlot operators. As calf prices continue to decline and the Canadian dollar hovers around 75 cents it is almost guaranteed that American buyers will be snapping up bargains and importing thousands of Alberta feeder cattle over the next six months. That’s a bad situation for Alberta feedlot operators trying to maintain a steady flow of cattle through their facilities. Importing American feeder cattle just doesn’t pencil out, even if you import United States corn and re-sell slaughter cattle into the United States market. It doesn’t mean it can’t be done but it would require significant skill and luck with a full hedging program.
One way feedlot operators have been trying to deal with the situation both presently and, I expect, in the near future is to market increasingly heavier cattle. Stats have shown that carcass weights have gone up significantly and that has kept the wholesale market supplied at steady levels. That over-finishing approach is expected to continue because of an expected large barley crop in western Canada that will soon be available to the feedlot industry. With low corn prices in the United States, barley prices will follow and with low feeding costs heavier cattle are sure to be the norm. No one can blame feedlot operators for that situation - factoring in lower calf prices that sector has a real chance to recover some of the huge losses they have endured over the past number of months. It’s going to be a challenging fall and winter for the feedlot sector in Alberta.