Optimism returns to the cattle industry

Wednesday, June 1, 2011

According to the World Bank Development Prospects Group, beef prices have risen 30 per cent in the last year. But the Canadian herd is not expected to expand rapidly and prices for other commodities have increased even more.
 

by MIKE MULHERN

In nearly 50 years watching the cattle business, Charlie Gracey has never seen the convergence of a high dollar, high beef and high corn prices  . . . until now.

Gracey, a consultant and board member for the Alberta Livestock and Meat Agency, credits the U.S. market for the high price of Canadian beef along with a reduction in the Canadian herd of about 20 per cent since 2005.

"The main driver behind the advancing price of cattle," Gracey says, "has been the decline in supply, particularly in Canada." Another huge factor has been the American success in increasing their beef exports to the world.

"That might seem a bit disconnected from our situation," Gracey says, "but it isn't in the sense that the United States is a deficit producer of beef. That is to say, it imports more than it exports." To meet its own demand for beef, he notes, "they back-fill from Canada."

Gracey believes the tight supply of Canadian beef and the high price is probably a fixture for a while. "The earliest we can expect any increase in supply in Canada would be 2014, and I'm being generous. They say we'll stop culling cows and we'll be in good shape, but reducing the culling of cows does not increase the herd, it simply slows the decline."

In his view, the only way to build the herd is to retain more heifers. "A heifer that's going to produce the increase was born this spring and will calve in the spring of 2013. Her increase, if dedicated to market, will reach market in 2014."

While the herd is one factor, Gracey says there are other factors that could slow the growth in Canadian cattle. "One is the need to recover equity after a long siege in the cattle industry. Another is the aging population of producers. I've spoken to some of them and they said, 'I've been waiting for these high prices as my exit strategy.' There's a lot of uncertainty ahead."

The uncertainty goes deeper than corn and beef. According to the World Bank Development Prospects Group, between the first quarter of 2010 and the first quarter of 2011 prices have increased 74 per cent for corn, 69 per cent for wheat, 55 per cent for palm oil, 36 per cent for soybeans and 30 per cent for beef.

Larry Martin, Senior Research Fellow at the George Morris Centre, an independent agri-products think tank in Guelph, says the rise in corn prices is due to short supply.

"We've got a stock/use ratio of under five per cent," Martin says, "which means the U.S. Department of Agriculture (USDA) is forecasting that we'll carry off about 12 days of corn at the end of the crop year."  He says analysts are already saying even that estimate is too optimistic.

One reason given for the short supply is demand from China. "China ordered 18 times as much corn last year as they ever have in history," Martin says. "The fundamental thing is we've got a lot more people with a lot more money than we've ever had before and they want to eat better."

Martin argues that pork prices are going to rise on demand the way beef has and that high prices are a long-term trend "as long as economic growth keeps taking place in the Asian countries."

Brian Perillat, manager and senior market analyst with Canfax, a division of the Canadian Cattlemen's Association that provides market analysis and trends, says fed slaughter animals peaked at $1.15 a pound live weight early in April. Bulls set a record price at more than 88 cents a pound live weight. Cull cows were also high at about 80 cents which, Perillat says, we have not seen since 2001.

"Cattle herds have been shrinking dramatically over the last six years," he says, "after BSE (bovine spongiform encephalopathy)." Total cattle inventory was 12.5 million head as of Jan. 1, 2011, which included dairy cattle. In 2005, we were at 14.9 million head.

"We dropped nearly a half million head from 2010 to 2011," he says, "but it's looking up. We've seen this big price improvement, so it has definitely brought some optimism back. We are slaughtering fewer cows and, once we start retaining more breeding stock, hopefully the herd will grow."

He says the herd is not expected to expand rapidly, however. "I'm not even 100 per cent sure we are even going to grow this year; it's yet to be seen." He says that high grain prices and high cow prices will increase cost to the cattle sector and this will create more competition for land. "People who used to grow forage for cattle production convert it to seed grain production. If there's lots of money in the grain side, they're not willing to convert back to cattle production."

Perillat says that cattle inventories worldwide have been shrinking for the past five years. "We've got a shrinking inventory and now we've come to the end of the recession and we're seeing demand pick up a fair bit."

Todd Austin, marketing manager for the Grain Farmers of Ontario, says corn prices are close to historic highs, noting that December futures for new crop were $6.60 a bushel. One of the main drivers, he says, is ethanol, which will absorb 40 per cent of the corn crop this year.

"I think right now it's a U.S. market thing. Ethanol is a huge buyer of corn. The United States is the main supplier to the world for corn, so there's strong demand from livestock for feed, strong demand for ethanol and strong demand for exports. I think it's a combination."

He says the supply is as tight now as it was in 1996 and that was before corn was being used for ethanol. He also thinks that any disruption in planting will have a huge impact on the corn market. "If the weather is cold and wet, even if you do get the corn in, what's the yield going to be?"

Earlier this year, a USDA forecast said farmers in the United States intend to plant 92.2 million corn acres in 2011, up five per cent from 2010 and up seven per cent from 2009.  If realized, it will be the second highest corn planting in the United States since 1944, just behind the 93.5 million acres planted in 2007. There are no comparable Canadian forecasts. BF