COLUMN - The Bottom Line

by Rick Wright

“Enough is Enough Already!”
Just when we thought we had seen it all in this business, something that defies all reason and common sense comes to the surface.

The National Farmers Union of Canada’s reported support of R-Calf has betrayed the Canadian cattle industry. And while the NFU has worked overtime to deny any alliance with R-Calf (regardless of their official stance) the damage has been done.

R-Calf has reported in a press release that NFU director, Neil Peacock, stated:
“NFU no longer views R-Calf as a threat because our cattle producers are facing the same challenges as the independent, U.S. cattle producers.” Peacock was also quoted as saying, “Just like R-Calf members in the U.S., we are fighting the packers, the mega corporations and the ramifications of NAFTA and the WTO.” NFU director Jan Slomp was quoted as saying, “We need to be allies with R-Calf.”

If R-Calf is not a threat to the Canadian cattle business then who is? For the past ten years they have worked very hard to close the border to imports of Canadian cattle and beef products. They have been a major supporter of M-COOL in its most stringent form. R-Calf seems to have the ear of Tom Vilsack, Secretary of Agriculture and the last thing Canada needs is R-Calf claiming support from a national farm organization in Canada.

Since the press release, the NFU claims that they do not support R-CALF. Maybe they learned a lesson that most of the Canadian cattle industry already knew —in the past R-Calf has stretched the truth to further its own goals, and cannot be trusted!
The NFU turned its attention to the beef business in an effort to recruit more members from an industry in crisis. Their report on the packing industry contains nothing new. It is long on criticism and short on realistic solutions.

In other news, the Competition Bureau announced that it would not challenge the acquisition of Lakeside Packers in Brooks, Alberta by XL Foods Inc. This should clear the way for XL to take over the packing plant and other assets in the very near future.
The interesting part of the story is that the Competition Bureau found that after interviewing 50 industry representatives, that those interviewed were more concerned about keeping the packing plant open and operating than the reduction of competition in the meat processing business. It is no secret that there has been very little interest by other parties in purchasing the Lakeside operation. Even though we all want more competition the industry, it is good that Nilsson’s took the chance on the Lakeside operation. Another plant in mothballs will do nothing to increase the chances of opening overseas markets in the future. If the Competition Bureau had stopped the sale, the plant could have closed, making Canadian cattle feeders even more dependant on the U.S. market.

The fear factor of the unknowns surrounding M-COOL has surfaced again.
The rules as published by the Bush administration will come into effect March 16, 2009. However, U.S. Secretary of Agriculture, Tom Vilsack, has strongly suggested that if the packers do not segregate the cattle and products and label accordingly, he will pursue changes that will force them to do so. It will be very interesting to see how the packers react over the next six months. U.S. packers and cattle feeders had asked the Bush administration to lighten up on COOL so that they could remain cost competitive. Meat industry representatives feel that there will be a big enough percentage of product labelled “product of USA” to meet consumer needs.

Protectionist groups like R-Calf are using M-COOL as a trade barrier. Fear tactics over BSE and food safety are being used to encourage the U.S. government to tighten rules like M-COOL. The fact is, country of origin labelling has nothing to do with guaranteeing food safety. Independent inspection at processors and retailers, along with enforced food safety production protocols throughout the food chain, will help address food safety concerns—not a label stating where the product was born!
Canadian imports for direct slaughter account for a very small percentage of the weekly U.S. kill, however the affects of COOL on the feeder cattle business could be severe.

In 2008 we exported 573,000 feeder cattle to the U.S, up 6.4% from the previous year. As of February 21, 2009 we had already exported 56,200 feeder cattle south. We exported 649,000 fed cattle south last year, the equivalent of one week’s USDA reported average kill in the U.S., down 23.3% from last year.

Last year we exported 157,000 cull cows and 43,300 bulls to the U.S. The total number of cattle exported was 1.432 million head. One interesting fact is that 24% of the beef exported from the United States came back to Canada.

Even though we think we are short on cattle, the shortage has yet to arrive. Cow cull was running about 15% last year, while the 15-year average was 10%. The beef herd shrank about 6.6% last year with Manitoba losing about 6.1% of its base cowherd. These numbers put inventory close to the spring 2003. If that is a fact, then we have finally gotten rid of the extra inventory created during the BSE crisis. The beef cow cull projections for 2009 are estimated at 927,000 cows - a huge decrease in the number of Canadian beef cows. In comparison, the U.S. beef cowherd declined 764,000 head last year, resulting in the smallest cattle population in 50 years.

Combine the cattle supply ratio with projected cheap grain prices and it looks like there could be a very bright light at the end of the tunnel. Even though consumers are not purchasing as much beef as before— and U.S. exports are down due to the high value of their dollar—the current demand-driven market could easily change back to a supply driven market in the next two years.

The two keys for a successful Canadian market will be free access to export to the U.S. and a Canadian dollar worth under 80 cents.

As far as price projections go, expect steady prices on the cattle between 700 - 900 pounds, providing American feedlots do not lose interest due to COOL. Grass-type cattle will remain strong, as demand will outlast supplies of green feeders less than 650 pounds. Kill cows should remain strong, while bred cows look like a good buy. Finished cattle prices will continue to struggle in the second and third quarters as beef retailers compete with cheap pork in the stores and consumer spot purchases.
Until next time . . . Read more!

COLUMN - The Bottom Line

by Rick Wright

As December 2008 draws to a close, cattle producers from all across Canada look to the future with more unknowns than ever before.

Even the strongest optimists in the cow calf business are questioning why they are staying in the business after 55 months of depressed cattle prices and increased input costs.

The major obstacle preventing the cattle market from taking off is the “Fear Factor” of the unknown. Until all of the rules and interpretations of “COOL” are figured out, the cattle feeding sector of the industry has no idea how Canadian origin cattle will be handled, where they will be killed and what if any discount will be applied.

The new Democrat administration under the leadership of Barack Obama looks to be more concerned with food safety issues than free trade issues. Their party platform supported smaller farm subsidy payouts capped at $250,000 per farm. They support ethanol production, which in turn means higher corn prices. They support tighter rules on environment issues concerning “confined animal feeding operations” which include cattle feedlots. They were major supporters of “COOL” prior to the election and are recognized as more protectionist than the Republicans.

If you look at the post election map, the majority of the cattle producing and feeding states supported the Republicans in the election and may not have as much influence as they did with the previous government. There is nothing to indicate that Democrats will make it easier to export cattle to the U.S.A.

The “Fear Factor” of this unknown is what is making the feedlots on both sides of the border nervous about purchasing calves at higher prices. Most of the buyers in western Canada and the United States have built in a discount margin on their inventory orders to cover their projected discounts on the finished cattle.

On the south side of the border, inventory that will be slaughtered before April 1, 2009 looks like it will have little to no discount. Currently packers are using labels that have origin of “U.S.A, Canada or Mexico” to get around the COOL regulations. Industry sources report that the USDA is putting pressure on American packers to produce more “Product of U.S.A” meat after April 1, 2009.

Rumours are that industry is asking for a six-month extension before the hard enforcement of the COOL regulations. This would give packers and retailers more of a chance to fine tune the logistics of handling all the products affected by the COOL rules. It would also give the new faces in the Department of Agriculture a chance to see how the COOL rules are affecting the whole livestock production, meat processing and retail/wholesale business. With the U.S. economy in a state of chaos, Obama will have higher priority issues to deal with than COOL. I do not expect any positive changes in the near future, if at all.

Western Canadian feeders are also facing a lot of uncertainty. They need to be able to access U.S. packers for competitive pricing. If the Nilsson purchase of Lakeside packers goes through, it leaves only two major packers left in the west killing finished cattle. Experts agree that you need a minimum of three in the mix to make prices competitive. With limited options to ship their finished cattle south, many feedlots are reconsidering their business plans and prices they are prepared to pay for feeders.

In Manitoba and Saskatchewan, a lot of the feedlots are backgrounding rather than finishing. For the first time in years there are empty pens, as the feedlots don’t want to take the risk of owning their own inventory and custom feeders are harder to find.
The good news is that the Americans are short of cattle. If they could get some solid response as to how the packers intend to handle the Canadian origin cattle, they would be active buyers on our markets like they were in the spring. There is a surplus of feedlot space and all of the packers are running below capacity. Their strong dollar has put them back into a competitive position to purchase Canadian cattle. Their export markets are increasing for beef products which means they need to source more cattle to meet the domestic demand. The number of cattle they import from Canada is about three percent of their national production. Small numbers for the Americans, but free access to their market is a huge part of the formula for the success of the Canadian cattle business.

This fall we have seen a large number of cow calf producers of all ages sell their herds. A sad sight at the markets, watching good cows sell at rock bottom prices with very few producers in the stands to buy them. It is disturbing to see so many of the county’s cattlemen and women that have worked so hard to save their herds since the start of the BSE crisis in May 2003, finally have to give up and look for another way to make a living.

We are not just losing cattlemen we are losing food producers, and with the grain producers not far behind, I wonder who will feed our nation in the future? When we read about Government bailouts for other industries and the protection of union jobs to help the economy, I can’t help but ask the question when will the government and people recognize the agricultural sector and protect them as well? It would not be a hand out but rather an investment in the Country’s future.
Until next time, Rick Read more!

COLUMN - The Bottom Line

by Rick Wright

What a roller coaster ride the fall calf run has been! Lots of ups and downs, twists and turns. Prices have been very unpredictable and demand has been very selective. Order-Buyers are sticking tight to orders and there has been no speculation buying at all this year.

Usually the last week in October and the first week in November are the largest marketing volumes of the fall in Manitoba. This year, deliveries are slow compared with other years as producers hold on to their cattle hoping for better pricing. Most of the large auctions market report a decrease in the numbers sold from August 1 to now. Gladstone’s numbers are up slightly and the Killarney market has really increased its weekly numbers. Direct sales from the farm to buyers have also increased as producers try and cut marketing costs while looking for price guarantees on an unstable market.

The Prices improved on some classes and weights of cattle late in October. The drop in the value of the Canadian dollars helped offset the losses on the cattle futures markets, keeping the Americans interested in purchasing Canadian feeder cattle. The drop in the dollar also helped make the cost of backgrounding feeders for American investors at Manitoba feedlots more competitive.

The only reason the Americans are not jumping in the Canadian market with both feet is “COOL.” There are still too many unknowns as to how the packers will treat the Canadian origin cattle fed in the United States. It looks like there will be little to no discount on the cattle that will be slaughtered prior to April 1, 2009. That is why the prices for yearlings off the grass remained strong while the wet nosed calves were a tougher sale. Originally the majority of the major packers indicated that they would label all beef fed in the USA, category 2 (Product of USA/Canada). Immediately there was pressure from the American side that this plan would undermine the purpose of Country of Origin legislation. Packers were told if they did not have beef in category 1 (Product of USA) there could be changes to the rules on how category two and three products were handled in the food chain. These changes would be very burdensome and costly for the packers, wholesales and retailers. As I write this, we await word from the packing industry in the south as to what kind of discount, if any, there will be on non-American born cattle.

Cattle finished in Canada will face a bigger challenge. By the time you read this, JBS Swifts is expected to announce that they will no longer kill finished cattle from Canada at their plant in Greeley, Colorado. This means all finished cattle from Western Canada destined to the United States will have to be killed at Pasco, Washington (Tyson) or Hyrum, Utah (Swifts). The plant in Utah is approx. 1100 miles from Brandon, Manitoba. Rumours from the south are that the packing companies feel the Canadian government has not done enough to influence the USDA and American government to protect the Canadian cattle producers on the COOL issue. Maybe it is time the American packers and Canada’s trade department sat down together to develop a plan to present to the new President for consideration.

Despite the fear of the unknown, Alberta feedlots finally started to purchase from Manitoba markets in mid October. Prices in Alberta finally increased enough to have some of the bigger lots looking outside the province for inventory.
Quebec feeders got good news the last week of October. It looks like Smithfield’s plant (now JBS Swifts) in Pennsylvania is going to start purchasing cattle on the cash market and is looking at possible contracts in the future. Despite the high cost of transportation this year, feedlots there have a renewed interest in purchasing Manitoba calves.

I certainly do not see any major price increases in the calf prices for the remainder of 2008. The world economy is far from being stabilized and until that happens, the fundamentals that influence the cattle and meat markets will be very unpredictable.
The best advice that I can give today is cull your cowherd hard. Now is the time to get rid of the free loaders and poor producers. The cow market is decent and you cannot afford to feed those extra cows. Heifer prices are under pressure and in most cases you can get more money for your cull cow than your best heifer calf. If you are going to keep something back, the heifers look like they are worth the feed. There will be lots of seection at the bred cow sales and the majority of the breds sold so far this fall have gone for slaughter at market price.

If you do the math, most of those poor producing 1,500-pound cows will eat more feed this winter than their calf is worth this fall when you consider hay prices at 4 to 5 cents per pound delivered (most of the cows will eat $1.60 to $2.00 with off hay per day), plus straw for bedding, interest on your investment, corral cleaning costs, and depreciation on your equipment and facilities.

This is a good year to pay the preg checking bill and cull those free loaders.
Another bit of advice is: Age Verify your calves and any of your home raised cows. Regardless of what you have heard it does not cost you anything and if we want to develop more markets for our cattle in the future, age verification and traceability will be very a important part of the formula to moving beef into new markets. Today on cull cows, the premium is between $75 and $140 per cow if they can be exported to the U.S. With Alberta going to mandatory age verification on their calves in January 2009 and Quebec already there, it will just a matter of time before we will have do ours as well to market our calves to those feedlots. Read more!