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Beef Watch: Canadian cattle inventories continue to decline on strong beef demand

Prepared by the staff of Canfax and Canfax Research Services, divisions of the Canadian Cattlemen’s Association

Canadian cattle inventories continued to decline in 2019 with strong beef demand supporting cattle marketings. A pork shortage in China due to African swine fever has sent all meat prices to record highs in that country and resulted in strong demand for protein imports. As the virus is sweeping through Asia, production losses are expected to grow and the impact on the global animal protein market will be dramatic and long-lasting. International demand for Canadian beef has been strong, but uncertainties remain regarding market access to China, the U.S.- China trade war and the new trade agreement between the U.S. and Japan.

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In the domestic market, fed cattle prices have been under pressure with increased cattle supplies. Poor feedlot margins are limiting feedlots’ willingness to pay, but significantly lower feed costs are expected to support calf prices this fall.

Cattle inventories

Canadian inventories continued to decline

The Statistics Canada July 1 cattle inventory report showed that numbers continued to decline. Total cattle inventories dropped 1.3 per cent to 12.3 million head, which is the lowest level since 1988.

Beef cow inventories were down 1.7 per cent to 3.7 million head, which is the smallest since 1989. Beef breeding heifers are down 4.8 per cent at 637,800 head. This is the lowest level since 2010, and the third lowest since 1987. Total beef breeding female inventories are down 2.2 per cent to be the smallest since 1988. Yearling steer and slaughter heifer inventories were down 4.5 per cent to 1.5 million head and 4.7 per cent to 840,000 head respectively. On the other hand, calf numbers were up just over one per cent. The higher number of calves was the result of five per cent more calves on dairy farms and seven per cent more calves in feeding operations. The higher number of calves in feeding operations is likely related to more U.S. feeder imports this year.

Source: Statistics Canada.

The declines in cattle inventories stem from a shrinking breeding herd, while increased cattle marketings this year accelerated the drops. As of late-September, steer slaughter was up five per cent, heifer slaughter was up six per cent and cow slaughter was up two per cent. Live cattle exports have also increased with steers up 25 per cent, heifers up 67 per cent, bulls up six per cent and cows steady in the first seven months. Feeder exports were up nine per cent with heifers accounting for 77 per cent of the total, up from 69 per cent last year. Annual fed marketings are projected to increase 10 per cent (or 280,000 head) with steers up seven per cent (or 131,000 head) and heifers up 14 per cent (or 149,000 head). Non-fed marketings are projected to increase two per cent with cows up two per cent (or 16,000 head) and bulls down two per cent (or 1,000 head).

While the increase in fed marketings is partly supported by feeder imports, which are up 44 per cent year-to-date in 2019, the very dry start to spring in parts of Canada resulted in more replacement-type heifers being marketed and put into feeding programs rather than exposed. Tight hay supplies last winter resulted in large cow slaughter the first quarter. The beef cow culling rate is projected to be 13.8 per cent, which would be the second year at liquidation levels.

Looking forward to 2020, weather will continue to be the key factor in herd expansion. The African swine fever outbreaks in China and other Asian countries are causing a dramatic reduction in global meat supply. This could boost trade and meat prices in the global market, providing an opportunity for expansion in the beef sector.

U.S. inventories peaking

The USDA July 1 inventory report shows that the U.S. herd has stabilized after five years of expansion. Total cattle and calf inventories were steady with a year ago at 103 million head, which remained the largest inventory since 2008.

Beef cow inventories were also steady with last year at 32.4 million head, which is only one per cent higher than July 1, 2017. Beef replacement heifers were down 4.3 per cent at 4.4 million head. This is the third consecutive year of a lower beef replacement heifer inventory, and the number is now 9.2 per cent lower than the 2015 peak of 4.8 million (there was no July report released in 2016 to compare).

Source: USDA.

Steady beef cow numbers combined with the decline in replacement heifers in the past three or four years indicates that the U.S. cow numbers are likely near their peak and could result in a modest decline in cow numbers going forward. However, there does not appear to be much of a liquidation phase at this time as good grazing conditions across the U.S. are keeping cow slaughter moderate.

The 2019 calf crop is estimated to be slightly down by 0.2 per cent at 36.3 million head, which remains the second largest calf crop since 2007. The growing calf crops over the past few years and a reduction in heifer retention has resulted in significantly more heifers entering the feeder supply chain. The number of feeder heifers (>500 lbs.) was up five per cent from a year ago at 7.9 million head, to be the largest feeder heifer inventory since 2007. Feeder steers (>500 lbs.) were up one per cent at 14.7 million head. Total number of feeders over 500 lbs. was up 600,000 or three per cent.

While the growth of U.S. cattle inventories is slowing near the peak, a historically large calf crop and feeder supply is expected to support beef production in 2020.

Global market

African swine fever (ASF) update

Since the first ASF outbreak in China in August 2018, the virus has spread across the whole country and is sweeping through Asia with cases reported in Vietnam, Cambodia, Mongolia, North Korea, Laos, Myanmar, the Philippines, South Korea and East Timor.

China is home to half of all the pigs on the planet and Chinese pork production is only eight per cent less than that of the rest of the world combined. In 2018, China’s pork production is estimated at 54 million tonnes, while global pork exports totaled eight million tonnes. This means that if the entire world diverted all of their pork exports to China, it would only represent 15 per cent of Chinese pork production. As 39 per cent of China’s sow herd is estimated to be gone and losses are reported to have accelerated over the summer of 2019, the shortage of pork supplies in China is projected to exceed 18 million tonnes. This is three times larger than Canada’s pork, beef and poultry production combined at 5.6 million metric tonnes.

The pork shortage in China has pushed all meat prices to record highs in that country and is affecting global trade flows. Chinese pork consumer price index (CPI) have jumped nearly 50 per cent year over year, while beef, mutton and chicken CPI were all up by 12-13 per cent. Pork imports were up 46 per cent in the first eight months with beef imports up 32 per cent and poultry up 64 per cent. In September, China granted export licenses to another 25 Brazilian meatpacking plants (including 17 for beef exports, six for chicken, and one each for pork and donkey meat) to export to China; and also approved eight Argentine beef plants and seven poultry plants for export.

With China aggressively buying meat from the global market, market access and trade policies will be key driving forces that affect global trade flows. Traditional meat importers such as Japan and South Korea will face strong competition for product, while countries without direct access to China will potentially backfill the gap into other markets. As the virus has spread to other parts of Asia, the production loss is expected to grow moving into 2020 and the impacts are likely to be as challenging as they have been in China.

Strong exports

In the first seven months of 2019 Canadian beef exports are up 15 per cent in volume and 24 per cent in value at 253,746 tonnes valued at $1.8 billion. The U.S. remained the major export market of Canadian beef, accounting for 72 per cent of total exports. Japan was the second largest representing 11 per cent of total exports, followed by Mainland China (five per cent), Hong Kong and Macau (three per cent), Mexico (three per cent) and South Korea (one per cent).

Unit price of total beef exports was up 8.5 per cent from $6.70/kg to $7.30/kg. Prices were up in most of the major markets except Mainland China (down eight per cent). Hong Kong saw the largest increase, up 24 per cent; followed by South Korea (+19 per cent), Taiwan (+18 per cent), Mexico (+13 per cent), the U.S. (up eight per cent) and Japan (up five per cent).

Exports to Japan continued to grow with volumes up 52 per cent and values up 59 per cent. This is on top of the record exports of 32,000 tonnes valued at $215 million in 2018. Canadian beef exports to Japan have benefited from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) implemented on December 30, 2018. On April 1, 2019 another round of tariff cuts came into effect lowering the tariffs to 26.6 per cent on both fresh and frozen beef. With that, monthly exports jumped 42 per cent from 3,608 tonnes in April to 5,121 tonnes in May, which is a new monthly record high volume.

Source: Statistics Canada.

The U.S.–Japan trade agreement signed on September 25 calls for lower Japanese tariffs on U.S. farm exports such as beef and pork to around levels granted to CPTPP countries. Once the trade deal comes in effect, it will level the playing field on tariffs for the U.S. with Canadian beef in Japan.

Exports to Mainland China were up 233 per cent in volume and 207 per cent in value year to date, but shipments stopped in July with the suspension of the issuance of Canadian meat export certificates to China on June 25, 2019. The suspension might also have an impact on the nearby markets (such as Japan, Hong Kong, Vietnam, etc.), as some products could be redirected to those markets.

Cattle prices

Fed market under pressure

Increased cattle supplies have been weighing on fed cattle prices in 2019, while the fire at the Tyson packing plant in Kansas in early August added extra pressure to the fed market. Alberta fed cattle prices dropped 16 per cent from the spring high of $162/cwt in April to a low of $136/cwt in September, which is four per cent or $6/cwt below last year’s summer low. Ontario fed prices were also down 14 per cent from the spring high of $151/cwt to $130/cwt in September. Ontario fed prices have been generally running at a discount to Alberta prices this year, but the gap has narrowed significantly from $24/cwt in March to $5/cwt in September.

Source: Canfax.

Feedlot profitability has struggled in 2019. As of September, estimated margins on steer calves have been negative for 16 straight months on a cash basis in Western Canada, with an average loss of $129/head. Estimated margins on yearling steers have been negative for 18 straight months on a cash basis, with an average loss of -$125/head.

The Alberta to Nebraska cash-to-cash basis surpassed year-ago levels by $1/cwt in September after being $3-$21/cwt weaker in the first eight months. Weak basis encouraged large fed cattle exports in the first quarter of the year, but as the basis strengthened, monthly export volumes have been generally declining to be closer to year-ago levels. A big driver behind the strengthening basis is local packer demand with some six-days kill weeks in the summer and fall, compared to some four-days kill weeks in the spring. Year-to-date federally inspected packing plant utilization rates moved up to 91 per cent compared to 87 per cent last year.

Source: Canfax.

Calf prices supported by lower feed cost

Alberta 500-600 pound steer prices continue to trade within the $210-230/cwt range, a trend that started in the fourth quarter of 2017. The monthly average in September was $213/cwt, down six per cent from $226/cwt last year. Ontario 500-600 pound steer traded at a discount to Alberta prices in the $200-210/cwt range. Prices in September averaged at $210/cwt, down four per cent from a year ago.

While poor margins limit feedlots’ willingness to pay, sharply lower feed cost will be a key factor supporting calf prices this fall. As of September, Lethbridge barley prices have dropped 20 per cent or $58/tonne from the summer high of $291/tonne to $233/tonne. Feed grain prices are likely to drop further as harvest delays, early snow in the Prairies and increased risk of frost damage leads to quality downgrades.

Source: Alberta Agriculture.

Replacement ratios

The lower the replacement ratio, the fewer dollars the feedlot must pay to replace a fed animal with a feeder; conversely a higher ratio means the feedlot must pay more per pound to replace those animals. Consequently, a higher ratio has negative implications on feedlot profitability as more dollars are spent placing new cattle.

Replacement ratios generally inched higher throughout the first three quarters in 2019. From Q1 to Q3, the ratios were steady to six per cent higher in the east, and six to 13 per cent higher in the west.

The current replacement ratios remained lower than the peak seen in Q3 2018. Year-over-year, the ratios in Q3 2019 were down five to seven per cent in the east, and down one to three per cent in the west.

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