Feedlot sector in trouble in Western Canada

Excess feeding, packing capacity | The beef sector is a significant contributor to Western Canada’s economy

A shrinking feedlot industry in Western Canada has repercussions for the entire beef sector.

Fed cattle prices are at record high levels but the feeding sector is experiencing near record losses of $100 to $200 per head for the last year because of high priced calves due to expensive feed and other costly inputs, Brian Perillat, Canfax’s senior market analyst, said in a webinar March 27. Cattle and feed account for about 85 percent of a feedlot’s total cost.

“Losing $150 a head for several months is definitely concerning,” Perillat said.

“We are seeing consolidation in the industry because of this but we are also seeing marketing changes. These losses assume a cash market.”

More feedlots are hedging and selling cattle on contracts that probably pay them an extra $150 per head, so they just break even.

However, packers do not have to be aggressive on the cash market when large numbers of cattle are tied up in contracts.

A recent Canfax study has found that the industry lost 20 feedlots in the last year that were able to feed more than 1,000 head. Feedlots of 10,000 head or more now account for more than 60 percent of the industry.

The sector has been declining since its peak in 2004, when 240 lots operated in Alberta and Saskatchewan.

The biggest decrease was seen in smaller operations. This year, 16 of 21 lots are no longer finishing less than 5,000 head. By comparison, there are now two more feedlots with 20,000 head or more compared to 2004.

The March 13 cattle-on-feed report for Alberta and Saskatchewan said the five year average for this time of year is slightly more than a million placements. In 2012, 942,845 head were on feed and the most recent report had 893,520 placed.

Canfax estimates there is 33 percent excess capacity in the West.

This is a North American problem. Earlier this year, the U.S. analysis firm Cattlefax reported 12 percent excess packing capacity and 25 to 30 percent excess feeding capacity.

That means too many packers are chasing a declining supply of feeder cattle, and the results are no profits.

Numerous factors are at play, but everyone feels the impacts when a major industry starts to shudder, said southern Alberta feedlot owner Chuck MacLean.

“When these feedlots decide to shut down, that is a big deal because they have long-term employees who are specialized,” he said.

“To be a pen checker or a feed mill operator in these feedlots today, you need to have some expertise.”

MacLean is also chair of Canada Beef Inc., which is charged with selling more beef at home and abroad. As he watches feedlots close, he wonders how long the business can continue.

“Here in feedlot alley, there are a couple of long-time feedlots that are shutting down. They are done,” he said.

Some have decided to move away from cattle and grow other crops because there is profit to be made.

“Why do we want to stay in this cattle business? Why don’t we just go farming because right now farming is fairly decent. Four or five years ago it wasn’t grand either,” he said.

MacLean said decommissioned feedlots are unlikely to reopen. He also wonders where packers will find enough supply if fewer cattle are on feed.

A major Cargill slaughter plant closed in Texas and a Quebec facility shut down in the last year, which leaves producers in those regions scrambling for a place to send their cattle. MacLean hopes exports will strengthen because it may be the salvation of the North American industry.

Global meat production has been in decline for six years, but the industry needs to watch predictions about growing demand, said Perillat.

Developing nations tend to look at pork and poultry because it is more readily available and cheaper.

“It is not a shoe-in for beef,” he said.

A number of factors have hurt the beef business, but the highest costs remain the price of cattle and feed. The situation may improve if the price of feed goes down or the Canadian dollar remains below par.

Perillat said feedlots should pay $1.48 per pound for a 550 lb. calf if they calculate the cost of gain at $1.10 per lb. and the cattle futures into 2014 predict $1.30 per lb. for finished animals.

However, calves could cost $1.78 per lb. if grain prices come down so that cost of gain is below $1.

A one cent drop in the value of the loonie should add three cents extra per lb. to a weaned calf. However, calf prices would drop if the dollar strengthens.

The changing fortunes of the beef industry affect the entire economy.

A University of Saskatchewan study commissioned last year by the Canadian Cattlemen’s Association considered the economic contributions of the beef industry to the overall economy.

The study looked at how a variety of sectors from cow-calf to processing make a significant contribution to Western Canada’s regional economy.

“A total of $24 billion worth of goods sold and a net contribution of the regional GDP of $8.8 billion are indicative of this importance,” said the authors of the report, which is available through Canfax.

“Directly or indirectly, employment of over 127,000 workers is related to the farm level production and processing activities in this region.”

Beef production is the largest agricultural sector in Alberta, providing $3.2 billion in farm cash receipts in 2011.

The industry contributes a total value of production of $16.9 billion.

This results in a provincial level GDP of almost $6 billion, including $3.6 billion labour income, and generates 62,612 jobs on a full-time equivalent basis.

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