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Resizing To Fit The Market – for Sep. 6, 2010

In his column this month Christoph Weder says for cattle producers to create value they must short the market and produce a differentiated product.

Shorting the market sounds like something a dairy or poultry producer would be more comfortable saying. So I called him up just to be sure he meant to say we have to short the market. He did, and that’s the way it runs in this issue.

There was a time, not that long ago, when cattlemen were all for growth in the beef business. More cows, more feedlots, bigger sales at home and abroad. It all looked so positive then.

Today, we’re talking about producing less so we can force the market to pay more for it. At first blush it has a sensible ring to it, but the inevitable question is, how far do you shrink before you start cutting into the bone? Most people seem to think we have too few packers today. If cow numbers go too low could we loose another?

XL Foods has already announced it is closing Moose Jaw. Mind you, supply was only one factor involved in that decision. When he spoke to the Livestock Markets Association of Canada in May, XL’s co-CEO Brian Nilsson said they were still planning keep the plant open, but only if they could negotiate a more flexible labour contract with the local union.

He said they couldn’t operate the plant efficiently under the contract they had inherited. As one example he said they couldn’t even match the work week to suit seasonal supplies of cattle. Initially they had enough surplus cows because of BSE to offset these inefficiencies. But when supplies are tight, inefficiency is something nobody can afford. Even after they shuttered the plant, their capacity didn’t really change Nilsson said. They slaughtered just as many cows as they did before, only they were doing it in Calgary rather than Moose Jaw.

Come to think of it, Nilsson did remind the auction market operators during that same talk that he was just about the only person in Canada after the first BSE cow was discovered who predicted that we would have to have to downsize the herd.

As things turned out he was right.

The Stats Canada July 1 inventory report for cattle and calves was released as this issue was going to press and the results were, as expected, down.

The total cattle herd slipped 4.9 per cent to 14 million head with the biggest losses on the beef side of the ledger. In spite of better pasture conditions in many areas beef cow numbers declined 5.1 per cent from last summer to 4.35 million head, confirming what everyone has seen happening at sales yards around the country. Beef replacement heifers slid another two per cent, reinforcing the view that the herd will continue to shrink for some time yet. Slaughter heifer numbers were down nearly six per cent as well.

Domestic slaughter and exports were up in the first half. Cow slaughter is running a bit behind last year, but slaughter cow exports to the U. S. are up about 24 per cent to roughly 111,000 at last count.

In short, there is no sign that producers have seen a signal to stop selling off the herd. Some of those sales were no doubt weather related. Drought in the Peace and waterlogged farms in Manitoba influenced some sales. Many others were brought in by people who were just played out by years of fighting the after-effects of BSE, country of origin labelling and collapsing financial markets. Even if the beef market is showing signs of turning around, and export sales are moving up, for some it was just too late.

I don’t know that we will ever see the wild and woolly growth of past years again, but what is needed now is a sharp uptake in the amount of gross revenue being produced by the industry. Stats Canada’s latest report on average total income for beef farmers reporting gross revenue over $10,000, including feedlots, between 2004 and 2008, merely highlights why cow numbers are declining. Over the five years, off-farm income rose from $30,131 to $41,853 while the net operating income of the beef enterprise went from $9,891 to $ 10,671.Net market income went from a loss of $7,985 to a loss of $1,349, so I suppose you could say it is improving.

In May Nilsson said the Canadian herd has been sufficiently resized to fit the current market. Canadians were not the only ones reducing the beef herd. Downsizing has been going on in Brazil, Australia and the U. S. with the result that in his estimation we are now moving into a cycle where gross revenue in the cattle business will finally start to improve. He’s looking for the turnaround to start next year.

So maybe Christoph was right. I think I liked the boom better.

———

Thatsounds betterthan sayingthe businessis shrinking

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Gren Winslow

Gren Winslow is a past editor of Canadian Cattlemen.

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