July 5, 2016
Canadian beef's supply side dilemma
By ERIC J. BROOKS
An eFeedLink Hot Topic
- A depreciated Canadian dollar makes domestic beef processing more profitable than live cattle exports, boosting slaughter rates
- 2015's sharp fall in slaughter rates was partly offset by high finishing weights; 2016's increased cattle slaughter is partly offset by lower finishing weights
- Rising inventories are due to less slaughter, more animal retention, fewer exports, not higher calf production
- With cattle numbers falling faster than domestic consumption, exports, world market ranking are falling
- Supply-side constraints, low Latin feed costs imply that Canadian beef needs to go upmarket
Partly due to the fact that North America's cattle price boom started in the US heartland, partly because of drought conditions in leading Alberta and Saskatchewan (which hold 65% of Canadian cattle), Canadian cattle herds are two years behind their US counterparts in their inventory rebuilding process. Hence, instead of rising as they did in America, Canada's cattle inventories fell by 2.5% in 2014 and stayed flat last year. For 2016, rather than rising 3% as originally anticipated, they are projected to increase only 2.1%, from 11.30 million head in 2015 to 12.175 million head this year. This overall increase however, does not include beef cattle inventories, which are staying flat at 3.8 million head.
With actual cattle production up only by 35,000 head (to 4.31 million), two thirds of this 245,000 head increase is accounted for by falling live cattle exports to the US. This is admittedly counterintuitive, as last year's repeal of America's Country of Origin Labelling (COOL) legislation should have boosted live cattle exports.
In this case however, macroeconomics counterweighted the impact of COOL's abolition: When the Canadian dollar fell sharply, domestic meat processing became competitive relative its US competition. This made it more profitable to feed and slaughter cattle in Canada itself than it was to export.
As a result, live cattle exports are plunging 21.9% or 182,000 head, from 832,000 head last year to an expected 630,000 this year. With this year's cattle slaughter having fallen by 267,000 head or 8.4% from 2015's level, more than the entire 2% herd expansion is accounted for by higher cattle retention and fewer exports, rather than increased cattle production.
At the same time, caught between between rising cattle prices and drought conditions, farmers resolved this contradiction by spending more on feed, thus fattening cattle up to higher finishing weights. With slaughtered 2015 cattle weighing 3.6% more than a year earlier, they partly offset the steep 8.5% fall in slaughter numbers, resulting in beef production falling 4.5%, from 2014's 1.10 million tonnes to 1.05 million tonnes in 2015.
But the market has turned and with 2015 looking deflationary, Canadian cattle ranchers adjusted their behavior accordingly: Because they expect live cattle prices to keep falling, farmers are minimizing feed costs and selling animals early in an attempt to lock in higher prices. Consequently, slaughter weights are expected to fall; such that this year's 2.4% increase in herd size will only result in a 1.4% in beef production, to 1.65 million tonnes.
Going forward, with Canada's currency staying 20% below parity with the US dollar, feeding and slaughtering a larger proportion of the national herd will remain more cost-effective than exporting it to US feedlots. With some of those retained cattle approaching maturity, slaughter rates are expected to rise 3.5%, from last year's 2.9 million head to 3.0 million this year.
This is still below the 3.175 million cattle slaughtered in 2014 –and remains substantially less than the 3.7 to 4.4 million cattle slaughtered annually from the mid-1990s through 2010. This ultimately reflects how after peaking at 14.9 million head, overall cattle inventories remain 20% below their peak near 12 million. Moreover, the supply situation even worse for actual beef cattle: From a peak of 5.25 million animals in the mid-2000s, beef cattle languish 25% below their peak, near 3.8 million head.
Due to this steep, secular decline in cattle numbers, Canadian beef production fell 30% over the last ten years, but domestic consumption only fell by 14.9%. With cattle numbers having fallen two times faster than domestic beef consumption, it is difficult for Canadian beef to maintain its place in the world market.
Beef export volumes had their heyday last decade, fluctuating in the 530,000 to 650,000 tonne range in the early 2000s, peaking at 657,000 tonnes in 2005. Exports rose from 10% of Canada's beef production in the mid-1980s to 31% in the mid-1990s, after NAFTA opened the gate to the US market.
Having peaked at 50% of output in the early 2000s, exports still absorb 40% of Canada's beef output –but with one important difference: As the attached graph shows, the gap between actual beef production and domestic consumption has narrowed considerably. Recent years have seen export volumes 35% to 40% below their mid-2000s peak. Even these export volumes were only maintained by doubling beef imports from their average 2004 to 2006 levels.
All this has done serious damage to Canada's standing in the international beef trade. Ten years ago, many leading beef exporters counterbalanced declining domestic beef production and consumption by exporting a higher proportion of total output. This kept exports constant in a world market that wasn't growing at the time. With rising red meat demand in China and Southeast Asia, this strategy is no longer feasible: Canada's beef exports have been flat or declining in a world beef market that has been growing for the first time in decades.
As a result, from its fourth ranked beef exporter position ten years ago, Canada has fallen to number six and could be overtaken by Argentina, Uruguay and Paraguay within five years. Furthermore, Canada's Latin competitors have two major advantages.
First, with oil prices having bottomed out, the Canadian dollar will soon start rising back to normal levels, and with it Canadian beef's production costs. This is unfortunate, because Canadian feed costs are higher than both those of the United States, and also those of its emerging South American competitors.
Second, this lack of cost competitiveness can be seen in one facet of Canada's beef trade. After being kick-started by its free trade agreement with the United States, the proportion of Canadian beef exports destined for the United States fell from 95% in the early 1990s to 83% in 2000. However, this proportion has been stuck in the 75% to 80% range for several years, implying that except for the US market (where it enjoys an advantage in lower shipping costs), Canadian beef has not been able to capture any overseas markets in a noteworthy way.Thanks to a recent free trade agreement in China, this has started to change in East Asia: Total imports to China and Hong Kong (which can be treated as a single market) rose from a USDA estimated 34,000 tonnes in 2013 to 37,000 in 2014 and 51,000 tonnes last year. Even so, Canada's 5% share of China's market for imported beef is dwarfed by the 31% share enjoyed by Australia or 15% share that belongs to New Zealand, or 14% that belongs to Brazil –even though Brazil only had its beef exports to China liberalized in the last few years.
Similarly, Uruguay and Argentina, which look to soon overtake Canada in beef exports, went from almost nothing a few years ago to 24% and 10% shares of China's imported beef market in 2015.
Third, while Canadian cattle numbers are poised to rise for several consecutive years for the first time in over a decade, this will probably come too late. By the time the actual number of beef cattle start to increase, its market cycle will be bottoming out.
On one hand, between the late start of Canadian cattle's supply recovery and its relatively high feed costs, its supply increase will be more limited than that of the US beef herd. On the other hand, freed from government restrictions, the supply of Argentine beef available for export will multiply within a few years.
All this means that with its high cost and inability to significantly to boost supplies, Canadian beef may be destined for a niche market role. Perhaps Canadian cattle rancher should consider repositioning their beef as a high value, grass-fed, exclusive niche market, thereby placing it at the narrow, but lucrative top end of an expanding world beef market.
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