The Bottom Line

by Rick Wright

To say that cattle producers are disappointed in this fall’s calf prices would be a huge understatement.

The early fall cattle prices started stronger than expected and it looked like prices would be close to last year. The yearlings off grass sold strong with active demand from the United States, even though the start of COOL was right around the corner. Calf sales were strong despite light offerings. Producer anxiety lessened with the hope that, despite record grain prices, the calf prices would stay at over a dollar on the heavy calves.

As cattle producers we sometimes fail to look at the whole industry picture and focus only on local rather than national, international and global issues.

The majority of cattle producers in Canada had no idea what effect the “economic storm” in the United States would have on the cattle prices this fall. The financial collapse of some of the major established investment firms on Wall Street in September sent shock waves to the core of the American economy. As a result, Commodity Fund Investors started to liquidate their positions on the futures markets causing cattle, grain and energy futures to drop.

The second major impact was the devaluation of the American dollar on the international market. As in the past when the American dollar drops, the Canadian dollar goes up. Every time our dollar goes up it lessens the purchasing power from south of the border for both cash cattle and services in Canada such as custom feeding. At the same time that the economic storm was ripping through Wall Street, real tropical storms were shutting down petroleum production in the southern states, pushing fuel prices, energy and corn prices higher.

High grain prices in the spring meant that less silage acres were planted this year. Drought conditions in the west and flooding in the northeast Manitoba created a shortage of hay. This will probably result in more producers selling calves this fall and less Manitoba feeders willing to buy them. If this happens, we will be relying on out of province feeders to purchase most of the Manitoba feeders.

Quebec has always been a big supporter of the Manitoba market. This year the demand from the east may not be as strong as previous years. For the time being, Quebec producers have lost their ability to forward contract finished cattle to the United States. A combination of COOL and Korean demands have closed the door for risk management and markets for their finished cattle. This leaves Cargill at Guelph as the only major packer close enough to handle the large volume of Quebec cattle. Freight rates from Manitoba to Quebec this fall are between 9 and 11 cents per pound and there is a shortage of trucks. Pressure from Quebec cow-calf producers for the Federation to change the provincial assistance program to cover only Quebec born calves has worried some feedlot operators. Those feedlots from Quebec that continue to buy in the fall will be more price sensitive this fall than ever before.

Ontario buyers have struggled over the past few years to make a profit on the western calves. High input costs and land prices, combined with a lack of competition for the finished cattle has made Ontario a distant fourth in the list of cattle buyers for Manitoba calves. This is a far cry from the 1980s and 90s when Ontario was the “King of the Ring” at the western calf sales. A recent report on corn and ethanol production for eastern Canada stated that if the majority of the approved ethanol production centres get into production, they will require all of the corn grown in both Ontario and Quebec. This will mean that cattle feeders will have to purchase corn priced at the import price from the U.S. The conclusion of the report is that cattle feeding in both of those eastern provinces would be reduced considerably in the future, and questioned the overall potential profitability of the cattle feeding industry in the east. It looks like the east will never again, be the major player in the Manitoba cattle business that they were in the past.

In Alberta, the Government is pouring millions of dollars into their own provincial beef production business. Over the next few years their support will focus on strengthening the Alberta based producers and feeders and developing an Alberta branded product. The rest of the provinces in Canada do not have the same deep pockets or the desire to finance a project of that size. How much demand Alberta will have for Manitoba calves this fall is unknown at this time. Transportation costs, lack of Age Verification and questionable management practises by some Manitoba cattle producers will challenge our ability to market large volumes of cattle into Alberta in the future.

Until all the packers in the south open their doors to Canadian cattle for immediate slaughter, there will be very few cattle finished in Manitoba and Saskatchewan. Currently, the only two plants that will kill Canadian animals are Swifts in Greeley, Colorado and Tyson in Pasco, Washington. Both have a limited number of days a week that they kill Canadian cattle and transportation costs from most feedlots in Manitoba and Saskatchewan make it difficult to ship cattle there.

This leaves the United States as the only potential buyer for large volumes of Manitoba feeders this fall. Despite the unknown about COOL, there is strong demand from south of the border for the Manitoba cattle. The cattle have to be delivered to the feedlots in the south at a price equal or less than the American market. The cost of trucking and exporting an 800 lb. animal from Manitoba to Nebraska is between 10 and 11 cents per pound. Many of the charges from the vets are by the head, so the lighter the animal the higher the cost per pound.

The Americans have never been real keen on importing wet nosed calves direct off the cows. Drugs like Draxxin have helped, but they are very costly and have to be deducted off the purchase price of the steer. The strong dollar has hindered the cost effectiveness of backgrounding in Manitoba for delivery to the USA. With the futures falling during the economic depression in the U.S. it is very hard to get any profitable forward pricing contracts for spring delivery.

Wrap all these fundamentals together and it gives you a clearer picture as to why the calf market is as tough as it is this fall. There has to be a drop in the dollar or a major increase in the futures market for the calves to increase in price this fall. There is not doubt we will lose more producers again this year as input costs continue to rise, but the product payment remains the same or lower than last year.

There are no easy solutions in the crystal ball. Since the last edition of Cattle Country, I have lost my good feeling about this fall.