Slow to rebuild herds | With beef prices so high, it is more lucrative to sell to the meat market than as a replacement heifer
All the pieces have come together for the Canadian beef industry this year, yet expansion does not seem to be in play.
Record returns in Alberta that average $700 per head for cow-calf producers and more than $200 per head for feedlots are an incredible turnaround from years of debilitating losses.
Alberta feeder steers, 550 pounds, have recently fetched $281 per hundredweight, up from $165 at the same time last year.
“This should be signaling mostly expansion signals. A lot of the benefit gets passed back to cow-calf operations,” market analyst Brian Perillat of Canfax told the annual Canfax forum held in Calgary Nov. 18-19.
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“We are just not there yet.”
“Next spring, if we see these continued strong prices, we will hopefully start turning that corner,” he said.
Rebuilding may have begun in the United States, said John Nalivka, owner of Sterling Marketing Inc., of Vale, Oregon.
He estimated that cow-calf operators should clear $700 per head this year, and next year should be equally lucrative.
Cattle in the 750-800 pound range have achieved record prices this year.
“It is simpler to say calves are worth $1,500,” he said.
These prices may normalize the traditional cattle cycle, which is a 10 to 12 year period in which the beef herd alternately expands and reduces over several consecutive years in response to prices and profitability.
However, the U.S. herd shrunk significantly from 1996-2003. A minor expansion followed for two years and then receded. Producers sold off cattle continuously from 2006-13 because of bad weather and poor markets.
The wild card now is drought areas such as California. The major cattle producing state of Texas is also dry.
“The forage may have been kind of OK, but there is no water. Without the water, the forage doesn’t matter,” he said.
U.S. producers sold off their cows but kept heifers during the worst of the drought years. The result is a youthful cow herd, which at 29 million is the smallest in 51 years.
“Cows are in good shape and there are not a lot of old cows out in the north 40,” Nalivka.
“Guys have already culled through those cows and kept the heifers. They have a really nice herd of cows now.”
Expansion will be slow at one percent a year for the next three years, which would increase the total U.S. beef cattle inventory to 90 million by 2017.
On the upside, those remaining cattle are the most productive in history.
Each cow is producing more beef by weaning much heavier calves.
The same situation exists in Canada, where a record of 917 pounds was set last week for an average carcass. Perillat suspects those elevated weights will continue if prices for finished cattle remain strong.
“Next year we may see a record high carcass weight under these market conditions,” he said.
With cattle worth so much as beef, producers have to think about the value of a breeding female. A bred heifer could be worth $1,950 to $2,600 sold as a replacement, but it is likely to fetch even more if sold as a feeder at auction, destined for the meat market.
The result is that fewer cattle are being born, ultimately reducing the number of cattle being slaughtered.
Today Canadian packers are operating at about 82 percent of their capacity.
However, Canadian cattle slaughter could fall to 2.4 million head next year, which would push plants to the low 70 percent level.
As well, more than a million feeders, fats and cull cows were exported to the United States this year because feedlots and packers there are scrambling for cattle.
Nalivka estimates packers have lost $80 per head for the last five weeks.
The U.S. has the capacity to kill 28 million head per year, and packer utilization is at 86 percent. The industry would prefer 92 percent or better.
Fewer cattle means packer utilization will likely drop to 84 percent next year. However, feedlots in the U.S. are still profitable, exceeding $200 per head this year.
Nalivka is not sure feedlots can maintain those profits because their break-even costs are increasing. Break-even was around $1.40 per pound, but the current batch of cattle going on feed have a break-even of $1.75 per lb. Feed costs are reasonable, but calf prices are high.
Feedlots and packers will likely start losing money next year as the price of feeders continues to rise.
Packers could lose on average $2 per head this year and $18 per head next year.
Canadian feedlots are making similar profits but there are other factors to consider, such as basis and the falling loonie.
The top average price for a finished animal was $1.85/lb. in April with an average price for the year at $1.75.
U.S. feedlots have enjoyed strong futures-to-cash basis levels selling well above the futures prices, while Canadian fed animals are discounted.
“When they are doing that and we are selling that much weaker basis, we are facing a discount,” said Perillat.
Canadians are also watching the feed grain market. Corn prices have dropped substantially, but barley less so.
This year’s barley harvest was small, but weather problems at harvest may see other grains graded as feed and added to the mix.
However, the Canadian dollar is falling, which positively affects the price of cattle in Canada.
Every one cent slip in the loonie against the U.S. dollar results in a five cent improvement in the Canadian calf price.
Competition from the grain sector is also challenging the Canadian beef industry. More land has been turned over to grain production, even though forage prices have been strong.
Aging producers may also think twice about raising more cattle.
“It is easier to sit in a GPS controlled combine rather than pulling calves,” Perillat said.
Nalivka said the average producer is 58 years old. The cow herd may be younger, but the producers are not.
“It is not just demographics of the cow herd, but demographics of the people who run the cows,” he said.
