Feedlot closure is part of bigger economic picture

Livestock futures markets were slammed lower again last week with fed cattle and hogs each testing multi-year lows.

There is just too much meat on the market — pork and beef.

October live cattle futures fell to 98.900 cents per pound Sept. 30, the lowest point on a continuous chart since November 2010.

Chicago October hogs on a continuous chart fell to 49.025 cents per lb., the lowest level since Oct. 6, 2009.

Hogs fell 40 percent in the July-September quarter, which was the worst performance in a quarter going back to 1973, the year Reuters began collecting the data.

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It is hard to believe that livestock prices were the highest in decades because of shortages just 18 months ago. In the beef cattle sector, feedlots have been suffering the most for the longest period.

The closure of Western Feedlots in Alberta highlights the extremely challenging economics of the western Canadian feedlot sector.

The number of Canadian cattle and calves is around 12 million, down from the peak of about 14.9 million in 2005 and about the same level as in 1995. The number of beef cows is where it was in the early 1990.

The booming prices of the last few years were of a level that usually triggers herd expansion, but that has not happened in Canada. The western cow herd is expected to be smaller when the Jan. 1 2017, Statistics Canada inventory report comes out.

There is a feeling in the industry that many producers are older and don’t want the challenges of rebuilding their herds. The next generation might prefer to shift the forage and pastureland into crops.

The huge corn crops in the United States last year and this year that are driving down the price of corn has given American feeders a cost of production advantage over Canadian feeders.

As a result, it would not be hard to understand if a feedlot owner decided to call it a day, considering the financial environment that can be expected for the next several years and the changes in provincial laws that could add costs.

Western is not the only example of industry rationalization. Canfax says that feedlot finishing bunk capacity has decreased by almost 24 percent, or about 410,000 head, since 2005.

The departure of Western means one fewer bidder for Canadian calves and yearlings.

However, it also means that the remaining feedlots will be able to obtain the cattle that would have gone to Western and put them in their lots, increasing their utilization levels and improving their efficiency and operating margins.

The cow-calf producer could suffer because the feedlots won’t have to work as hard to get supply.

There are now 2.28 calves for each bunk space of finishing capacity compared to the five-year average of less than two, Canfax says.

However, it notes that the export market will provide a floor if prices fall too much.

Feeder exports are down 40 percent from last year and down 11 percent from the five-year average. That is because Canadian feedlots had to be aggressive bidding on the small number of available cattle if they wanted to keep their lots relatively full and efficient.

However, the export numbers could creep up if Canadian feeders’ bids lose their competitiveness.

Stepping back and looking at the larger perspective, we wonder if Canada will be able to maintain its share of the global beef market.

Canada currently produces about 1.8 percent of the world’s beef, putting this country in 11th position worldwide.

We provide 4.3 percent of the world’s beef exports, putting us behind India at 20 percent, Brazil at 19 percent, Australia at about 16 percent and the U.S. at six percent.

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