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Canada’s Beef Packer

When JBS representative Chandler Keys addressed the Albert Beef Industry meeting in February, he brought news of the world’s largest beef processing company’s global vision. It didn’t include setting up operations in Canada.

Brian Nilsson, co-owner and co-CEO of Canada’s largest Canadian-owned beef processor, XL Foods, has a different perspective. His company has one of the world’s premier producers of grain-fed beef sitting on its doorstep and he intends to make the most of it.

His mission is to see all of the cattle in Western Canada processed in Western Canada. And, of course, he’d like to process all of them, and pay producers top dollar.

XL Foods is part of the Nilsson Brothers Group of companies, which includes fully integrated beef operations across the Canadian Prairies, as well as packing plants in Nebraska and Idaho. In March, Brian and his brother, Lee, showed confidence in the Canadian beef industry when they purchased Lakeside Farm Industries at Brooks, Alta., from Tyson Foods.

Due to changing market fundamentals, Nilsson feels the Canadian packing industry is poised to develop more of its own identity as opposed to functioning as a subsidiary of the U.S. industry. The two most predominant changes are the contraction of the Canadian herd by 20 per cent and exports of live feeder and fed calves playing a less important role in price setting in Canada.

“By gaining our destiny back we won’t have to rely on how the U.S. prices us,” Nilsson told a full house at the Saskatchewan Stock Growers Association convention in June.

Today, 70 per cent of XL’s product is sold in the domestic market. “The U.S. and Canada are the best markets in the world for grain-fed beef. I really believe that the best market for Canadian beef is Canada,” he says. “If we are going to build an industry on an export industry, we will be disappointed. Exporting is a valuable tool to increase revenue, but not to build an industry.”

In his view export efforts should focus on what Canadians don’t use, such as organ meats, which sell for premiums in other countries. China, for example, is an important market for offal and tallow, but Canada won’t build an industry by selling beef to China because it can buy cheaper from many other countries. Likewise, no one in Canada will make a living trying to undersell Brazil and Australia in the Middle East.

Nilsson said Mexico is a good market for over-30-month boneless beef, and Korea is worth $25 per head. Though it’s a political nightmare for the beef industry, he says it will offer as much value as Japan in the long term.

The financial crisis has had an impact on offal and hide sales, which are important revenue streams for packers. Offal sales had recovered to a little better than half their pre-crisis level by mid-summer and Nilsson expects they will eventually level off at about 80 per cent of past levels. Hides remain under severe pressure, weighed down by plummeting sales of leather for automobiles, furniture, clothing and shoes. Prices dropped from near $50 last September to $10 at best in June and low-end hides were ending up in landfills in some parts of the U.S.

Reasons for optimism

“Beef is one of the old traditional industries that’s a good place to be when times are tough,” says Nilsson. True, people in North America are eating more end cuts and ground beef, and high-end cuts are selling at discount prices at the moment due to the financial situation. The positive news is that beef consumption has dropped only three per cent, while lots of sectors have lost up to 30 per cent of their sales.

In future, he says, the supply of grain-fed beef will tighten as the population of North America continues to climb. Guestimates are that downsizing of the Canadian herd may have reached bottom (barring a full-blown drought this summer) but the U.S. industry is at the midpoint of its contraction.

If these trends continue there could will come a time in the not-too-distant future when Canada and the U.S. won’t be able to meet their domestic demand for beef.

With all due respect to the Canadian Food Inspection Agency (CFIA) — and he wouldn’t want to run a plant without having them on the floor — Nilsson feels the proposed trade secretariat to separate trade from regulation within the CFIA is a good thing. He says the CFIA does a great job of keeping our food safe, and it should focus on that role.

As for U.S. mandatory country-of-origin labelling (COOL), he says it has hit the pork sector very hard because it is so reliant on exports. For beef producers, Nilsson says it’s not the worst thing out there. Half of the discount for Canadian cattle is because U.S. packers found they couldn’t

sell meat from Canadian cattle in the Korean market. The other half is associated with the extra cost of handling and segregation.

Most of XL product that heads south is trim and largely ends up in the food processing end of the market which is exempt under the current rule. Not surprisingly, he says he can live with the final rule as it is currently written. The more prescriptive COOL put forward by U.S. agriculture secretary Vilsack would have a huge negative effect.

Overall he feels, the industry will get over the bumps as the beef supply grows tighter. “Canada is through the BSE wreck and in the next five to 10 years will see prices higher than historical,” Nilsson predicts.

Regulations choke the industry

One dark cloud in Nilsson’s bright future picture is the heavy cost of Canadian regulation compared to the U. S. Specified risk material (SRM) regulations and the related enhanced feed ban that came into effect midway through 2007 have added significant costs and eliminated important revenue streams for Canadian packers without opening any additional markets. Meanwhile U. S. packers continue to access markets for rendered byproducts, such as meat and bone meal.

U.S. officials have wisely seen the pitfalls of banning the full list of SRM from use in all animal feed and have published a final rule that includes a short list, which amounts to about one-quarter of the quantity of cattle byproducts that would be diverted under a Canadian-style full SRM ban. The original compliance date for the U.S. rule of April 27 has now been moved ahead to October 26, 2009.

The impact of this disharmony of regulation has already being felt in Canada, according to Nilsson. “An $8 to $10 loss on cows (relative to U.S.) would be manageable and the Moose Jaw plant would still be open. When we’re $30 offside, that’s something else. It’s come to a head now that there’s a supply problem and we have no ability to be on a competitive footing with U.S. packers in the over-30-month cattle market. Without harmonization we will have even less of a packing industry in Canada, or cattle prices will be lower.”

Age verification is another topic he feels warrants careful consideration. “The U.S. will likely get under-30-month beef into Japan on dentition because it’s the simplest. If the U.S. goes to birth records, then I’m all for it because we can do it better, but the U.S. will do only what it has to to get where it wants to go,” Nilsson says. “If Japan gives the U.S. access to under-30-month beef with dentition, then Canada should go in with the same and not age verify unless we also receive the ability to do dentition.”

Dentition is far from a perfect technique. Some animals are mistakenly branded as over 30 months of age and heavily discounted. But Nilsson says that may only affect one-tenth of one per cent of all the cattle. So what, he wonders, is the cost/benefit of forcing the whole industry to adopt one solution to fix a small problem?

He believes Canada has used a European model to regulate its way out of BSE when the Canadian situation never warranted such extreme measures.

In his view governments and industry need to be careful not to regulate to the extent that they choke the very industry they are trying to save.

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