Lower prices for fed cattle are likely here to stay until the American border opens to live animals, industry officials agree.
The oversupply of fat cattle continues to push producer prices lower and Canadian packers’ gross margins higher.
The four major packers get the difference between the value of the wholesale meat and the fed animal. They are working to capacity, slaughtering nearly 75,000 animals each week while United States export demand for beef remains high.
American consumer demand for beef in the face of short U.S. supplies has driven up carcass cut-out values, which is the price of carcasses processed into primal or boxed boneless cuts.
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“Packer margins worked their way back to the dizzying heights of last fall on the strength of lower cattle costs and higher cutouts,” said Kevin Grier of the George Morris Institute in Guelph, Ont., in his June 7 summary of the Canadian boxed beef industry.
“The combination led to packer margins well over $550 a head, or about $100 better than the previous week,” Grier said.
Gross margins do not include killing, cutting and packaging costs, which the centre estimates at $170-$200 per head.
“The packers are making good profits right now, but they also suffered tremendous losses last year at this time,” said Jim Laws, executive director of the Canadian Meat Council, an association of the meat industry that includes packers.
But feeders face “significant losses and an industry that is on the brink of disaster,” said Brian Perkins who operates a 3,500-head feeding operation near Saskatoon.
“We bought cattle at optimistically high prices last fall. We speculated. We fed them all winter and now we have to sell them at a loss,” said Perkins.
“The financial institutions have been very patient until now. I’m not sure how they are going to take these losses. It has been one thing to speculate. Now they are real.”
Somewhat limited fed cattle supplies since January had a buoying effect on prices. However, as the feeder calves purchased last fall come to market and hopes fade for a June border opening, prices have tumbled from $87 per hundredweight at the beginning of May to last week’s $72.
Stan Eby, president of the Canadian Cattlemen’s Association, said the drop in fed cattle prices is tied to the Canadian supply and demand situation. It will not change unless the border opens.
The Kincardine, Ont., cattle feeder said feeder access to packers is compounding the effect.
“One of the major (Alberta) packers has had their June (slaughter) requirements bought for some time now. There is now little space for any new offerings,” Eby said.
Laws said some of his packer members have been approached by large cattle feeding operations with offers of lower prices.
And he said some packers are using order buyers to provide a structured purchase of fat cattle from a variety of feeders to ensure “they are getting a few from as many sellers as possible.”
Representatives from the cattle industry, packers and government met last week in Calgary to discuss the problem.
Laws said his members agreed to work together to increase capacity by sharing processing and cooler space where surpluses exist.
“Their staff have already been working six days a week. They are tired and need some time off. Summer vacations are here. And there may be some labour troubles ahead with (staff from the Canadian Food Inspection Agency) who may soon be in a legal strike position,” he said.
Laws said members will also look into the possibility of foreign worker permits to provide additional staff to packers.
Eby said the Calgary meeting generated a number of ideas.
“A lot of small feedlots have cattle ready to go. They have trouble accessing the packers because larger feeders are already there. We are considering some voluntary market quotas so everybody gets a chance to sell some cattle,” he said.
One suggestion was a national floor price based on U.S. fed cattle prices.
“The idea is that packers would be legislated into paying a price equivalent to the American fed prices, essentially sharing some of those margins,” Eby said.
The floor price idea was rejected “for now” because it would require federal legislation and because the CCA’s formal position endorses “open markets and free trading.”
Laws said packers are opposed to floor price systems. They believe the federal agriculture income stabilization programs “will hopefully be enough to get through this crisis.”
Eby disagreed.
“The programs aren’t going to cut it. I wish they would, but this is too big for what the government had planned for.”
The CCA struck a committee to look at a set-aside program that would pull some cows out of production this year, but that would also require federal government support.
Stavely, Alta., cattle producer Larry Sears said options are limited.
“There is no amount of planning on the part of a producer that will get you out of this. It is simple economics and a dysfunctional market with a huge oversupply.”
