AHEAD OF THE HEARD
There is nothing like a lot more loonies in your pocket than you expected to give you a more positive perspective of life. That’s what’s happening across the cattle industry; from cow/calf producers to feedlot operators, every producer is getting more for the cattle they are selling. That is a rather uncommon circumstance as the usual market situation is that one cattle sector will be making money from the other, rarely do they all make money at the same time.
Of course making money is a relative term in the cattle business – the question always is compared to what? From an inflation perspective, present increased prices need to be a lot higher, but that’s not the way it works in free-market agriculture. It has been said time and time again, that the only place a cattle producer can make money is by reducing production costs back on the ranch. The trick is to break-even in the bad years and sock away the gravy when markets are higher. That’s the theory anyway.
What knocks that market cycle concept around are the unforeseen circumstances which are becoming more common. Need I say BSE blew cattle pricing and marketing all to hell for the better part of the last seven years? Add to that droughts, border troubles, a high loonie, high feed costs and more mindless government regulations and you have a recipe for neverending market price misery. What a lot of those circumstances did was to convince a lot of producers, especially in the cow/calf sector to just give up, get out of the cattle business and rent out their land for a cash flow they could rely on. And therein lies the basis to the current high prices.
Cattle market prognosticators like to mention that the market has a price cycle that has gone on for almost a hundred years. That’s true enough, but circumstances have thrown that cycle off its pattern particularly in Canada. This time, there does seem a trend to a smaller cattle herd, not because of a cycle of lower market prices but the trend of producers wanting to get out of the business for good. It’s so pronounced that some analysts are predicting that there will be 400,000 fewer calves available next fall. Clearly that has feedlot operators concerned. At present there is no indication that cow/calf operators are holding back more heifers for replacement or expansion, but that may change if prices get high enough.
The American cattle herd, despite some good prices over the years that didn’t happen in Canada, has also seen a decline in their national numbers. That situation has and will lead to American buyers looking for more Canadian feeder cattle. The only reason it has not happened a lot sooner was the increasing value of the loonie and recently the paperwork/ID hassle created by the protectionist COOL legislation in the USA. But that too may change given the right financial incentive, any concerted effort by US buyers to buy Canadian feeders will create even more competition headaches for Canadian feedlot operators.
Having said all that, will these higher cattle prices last?
They probably will, for the time being. The danger always is that as higher prices work their way into the retail sector, consumer resistance to higher prices will develop and demand will drop. Also more offshore beef imports will be attracted to the North American market and that will put pressure on prices. The cycle will then drive prices lower. The only question is whether the North American herd will continue to decrease to offset the supply situation.
In Alberta, both feedlots and packers must be spending a lot of time trying guess what the immediate future holds. The reality is that with fewer feeder cattle available some feedlots are not going to survive. The big dogs usually survive as they have the ability to partially shut down some of their pens and still have economies of scale. They may also have the financial strength to import American feeder cattle that are close to the border in order to survive.
Clearly 2011 and 2012 are going to be interesting marketing years for cattle producers. Barring any weather calamities, it should be enjoyable for a lot of producers - for a change.