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SPIRITED VIEW – for Mar. 14, 2011

From a dismal “when should I disperse?” attitude to jubilation and “how can I expand?” all in less than six months. It’s amazing how the attitude of an entire industry can change so quickly. Looking back it is reminiscent of an old Western: the cow-calf producers making a last stand, holding on while many are dropping like flies and just as the fort is about to be overrun the cavalry shows up just in time.

To say it is fantastic to see prices rise for both the feeder cattle and cows is an understatement. What I like most is knowing that all of our net worth and balance statements have improved and look to stay that way for quite some time. The cow-calf sector is finally in the winner’s cycle!

However, just as in the old Westerns, there are losers and while they’re not quite there yet, there are darkening clouds on the horizon for the margin players beyond our ranch gates. Recently I had a chance to hear Anne Dunford of Gateway Livestock give her cattle market forecast. It was interesting to reflect on the numbers as she presented the demand and supply factors that will affect our business going forward. It is her prediction that the biggest losers will be the margin players in our business, the feeders and packers.

In the last 20 years, thanks in part to a low Canadian dollar, the Canadian Wheat Board boondoggle on coarse grain sales and aggressive attitudes about expansion in southern Alberta feedlots, we have developed a western Canadian feeding sector with a large demand for feeder cattle. The trouble is now the supply of feeder cattle is shrinking and that coupled with a growing global demand for coarse grains, has squeezed the wedge that feedlots operate under even tighter.

I expect that some will leave the business. Fewer feeder cattle will also mean fewer auction yards. As supplies get tighter even more producers will have opportunities to sell direct. This coupled with confidence in selling via the Internet could spell the end for many of the remaining yards.

As for packers, you may think that we are down to the minimum number already but if there are two it can still go lower. And this is what scares me the most. After the factory that creates the calf, the next most important part of the entire chain is having the plants to turn those calves into meat. Without them there is no beef business, only a feeder business. The big plants in the West operate on volume and each can kill and process over one million head per year. As our herds shrink there will be fewer and fewer cattle not only to feed but fewer to process. To get the cattle that remain will require steamier prices that may in fact come with a positive basis compared to the U.S. price. Provided that you can sell the beef produced at these higher prices, that’s great, but if packers are losing money because of their bidding practices, while handcuffed by higher operating costs for labour and regulatory burden compared to the U.S., they may eventually have a change of heart about continuing to run their operations here in Canada. This is something that our commodity industry cannot afford and what alarmed me the most when I look at the numbers.

Most farm and ranch owner/managers operate in the here and now. The fact is we all must. However, if you want to run a business with long-term viability you need to have long-term vision and planning. It’s no different with an entire industry. It’s great to have higher prices but sustainability is dependent on everyone making a dime. But I guess that’s not in the nature of the commodity beef industry, and why it is and will always continue to be a business of winners and losers.

If, hypothetically, we were to lose another major plant, then western Canadian cattle would be priced at a freight discount to the nearest competitive U.S. packer. We all know what’s happened to fuel and freight costs; they are not going to get any better. This would not be a welcomed added cost to a commodity player’s bottom line.

We would end up with a beef version of the Canadian Wheat Board. It has happened before, to the pork industry in Alberta and even though the province has some of the best pork producers and production practices in the world the prices the producers receive have been some of the lowest.

So what can our industry do to avoid this scenario? Number one, keep pressure on Canadian Food Inspection Agency to reduce its regulatory burden and costs and push for continued market opportunities for Canadian beef exports on a global basis. A better solution would be finding a system where cow-calf producers, feeders and packers could create value chains so they all can make a dime. That, however, means working and thinking outside of the box, which also means thinking long term and that never seems to happen. So we continue with the winner and loser model, only this time the cow-calf guy has the hammer and is the winner.

Dr.ChristophE.WederisapurebredAngusbreederinthe PeaceregionofAlbertaandalsorunsSVRRanchConsulting. HeisalsoafoundingmemberofPrairieHeritageBeefProducers. Foradditionalinfocheckout www.spiritviewranch.com.

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It’s great to have higher prices but sustainability is dependent on everyone making a dime. But I guess that’s not in the nature of the commodity beef industry

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