Selling Calves this Fall

[rsomer]

jmillang: "The US sends as much beef into Japan as Canada sends into the US"...Since Japan’s outbreak of BSE in 2000, U.S. exports to Japan have declined. In 2002 the dollar value of Canadian imports to the U.S. exceeded the value of US exports to Japan. See: http://www.cbc.ca/news/indepth/background/madcow_canusjapan.html

U.S. exports to Japan would be expected to suffer further declines as Japan raises import tariffs from 38% to 50% effective August 1, 2003. Depending upon how much Canadian beef the U.S. allows in under permit after August 8, I optimistically suggest Canadian exports to the U.S. could again exceed U.S. exports to Japan in 2003. Without significant imports of beef and live cattle from Canada I would question whether adequate volumes of beef, particularly the beef with white fat that the Japanese prefer, are available in the United States for export to Japan.

"on the good news side the US feeders have capacity they can't use as there are not as many calves out there as they have feedlots so if they really want to feed cattle they need to bring their equity up here and invest in either calves or lots.".... I don’t believe U.S. feeders will invest in Canadian lots. It will be a risky venture for anyone, American or Canadian, to feed calves in Canada from this point forward. There is no effective price risk management mechanism in Canada anymore, other than government ad hoc handouts which may not be there for the next pens of calves. There is a risk of more BSE positives if, as some suggest, testing is increased. As long as that border can be closed on a moments notice as it was May 20 the price risk of owning calves in a Canadian feedlot is very significant. American or Canadian feeders will need to pencil in a profit per calf fed in a feedlot in Canada of many times, perhaps 10 times, the profit needed in an U.S. lot to offset the border related price risk. Since the risk at this time is equal for a feeder calf whether owned by an American or Canadian the Americans have no competitive advantage here. If our calves are so cheap the Americans are buying them then I should be feeding them myself, taking the risk but expecting to get the profit too. Obviously with the price risk management situation on the Canadian side of the border, once the border opens to live cattle, feeders will all move south and it would not be a good investment to own a feedlot in Canada.

Simply said, no one is going to fatten a calf in Canada for $25 a head anymore. Canadian feedlots will not be competitive once live cattle can move into the U.S.

"Also in Alberta we have two packing plants that could utilize their boxed beef operations to a heavier demand and thus we could fill some pacific northwest demand via boxed beef rather than live cattle"...The USDA will allow live American fat calves to be slaughtered in Canadian packing plants and the meat returned to the U.S. as U.S. production, no permits or restrictions on boned cuts. That helps our American owned packers, but does little for the Canadian cow-calf producer in Alberta this fall. It is incredible to think that Canada is allowing U.S. live cattle imports, a significant number of which are infected with the more serious List A disease Blue Tongue while the OIE considers BSE a less serious List B disease yet the Americans won’t allow our cattle into their country based on a single positive. And Blue Tongue is contagious while BSE is not.

"We now live in a new marketplace (which may be better than the old one)"... Any better and we would be giving our calves away. It is the same marketplace, same consumer, only the politics and risk has changed.

[kato]

Topper..our problem is that MACC wants security on the loan. We know they are offering to value the cattle they take at a fairly good rate, but we don't know what the bank is willing to value them at. We are strictly a cattle operation, and cows are the main security on the operating loan at the bank. We don't want to find ourselves in a situation where we have no security left for our bank operating loan. To make it even more complicated, we just lost our loan manager at the bank, and don't even have anyone there to talk to about this.

Getting money from one MACC, only to have the bank say "You are undersecured on your operating loan, and we want it all paid off now" is not getting us anywhere. It can and will happen, trust me. We had the bank pull that stunt back in 1995, and it really hurt badly to have to come up with a bunch of cash, exactly when it is the shortest. It left us with a severe distrust of bankers.

We are going to keep an eye on the situation though, and once we do the math, you never know. One day at a time.

[pandiana]

rsomer. "Simply said, no one is going to fatten a calf in Canada for $25 a head anymore. Canadian feedlots will not be competitive once live cattle can move into the U.S." I am not sure I follow this argument. Assumming a resolution of the BSE problem, what has changed, dollar-wise, in feeding cattle in Canada? We still have a advantage in the exchange rate. We still produce a tremendous amount of feed and forage (in a decent year).

Your point on price risk management is well taken for exporting to Canada, but American feedlots have similar constraints in feeding cattle as Canadian feedlots (excluding a confirmed case of BSE).

[topper]

Kato: I talked with MACC and they say that they will be willing to take second charge on this loan unlike their policy on stocker loans. They also say that they will apply this loan to operating loan paydowns if the banks will agree not to cut the operating loans off after they are paid down. I talked to the bank and I think there will be little problem with them agreeing to this as they don't want worthless calves either and they will still retain first chance on the cattle. Hopefully things will get a bit better and a person won't have to consider this loan but I think it will be a workable option if worse comes to worse.

[rsomer]

pandiana: you said "Assuming a resolution of the BSE problem, what has changed, dollar-wise, in feeding cattle in Canada?"

The politics has changed and politics has a direct impact on investment in the cattle finishing industry in Canada or the U.S. and elsewhere.

I believe what has changed is a new recognition that politicians can close the border. Producers knew this could happen however, before May 20, the risk of the border closing was largely ignored. Not any more. If the border closes it is much better to be on the south side of the line than the north side.

I see the USDA allowing American beef to be slaughtered in Canadian packing plants and returned to the U.S. without restriction while continuing to restrict and discriminate against Canadian beef as negative for the Canadian feeding industry.

COOL is still out there with the possibility that it could be amended to allow foreign cattle finished in U.S. feedlots to be considered U.S. production. This amendment is favoured by Texas producers wishing to access Mexican feeders but it impacts the Canadian industry as well.

I see comments in beef magazines and rural newspapers that Americans will come up to Canada and buy our lots. Myself I see the politics pointing to the movement going the other way, Canadians moving their lots south. Some things are supportive of Canada’s feeding industry though.

It is possible that due to environmental concerns there is no room for expansion of the U.S. feeding industry just like we have run out of room in Alberta’s feedlot alley.

Governments in Canada have supported the feedlot sector through this crisis. If feedlots feel they can rely on government to provide adequate risk management in the event of another border closing this removes much of the risk associated with being on the wrong side of the border i.e. in Canada. Given the degree of concentration in Canada’s finishing sector with the majority of cattle owned by 33 large feedlots I am concerned that it is not politically correct to hand over hundreds of millions of dollars in government support to a few very large multi million dollar feedlot operators. As a result government support to the feedlot industry is more difficult than spreading the same dollars around to thousands of cow calf producers. The federal government support may not be able to save the feedlot industry.

However, the Alberta government has set a goal of increased agricultural value adding by 2010. Growth in the feeding industry is needed to achieve this goal. Given the impact the Crow Rate Offset Program had some years back on growing the feeding industry in Alberta one should not underestimate the degree to which Alberta could influence the feeding industry to remain in Alberta rather than move south. Kind of hard on Saskatchewan though.

[rusty1]

It's always amzed me at the distrust between the cow man and the feedlot opperator. History has proved that 12 out of 15 years a producer is better off retaining ownership. Here is a perfect year for the 2 (independent) dependent factions to make some good things happen together. I have always heard more bad mouthing comming from the cowboys about the feeders than from the other way around. What needs to happen (dream on) is a collective voice between toe two producers groups to stand against the organized robbers called the packing inductry.
There are alot of very good feeders out there that would be happy to net $25 for every calf the cowboys produce.

[cowman]

rusty1: You are so right about the feeder and cow/calf guy standing together! We sink or swim together! And I might add the grain producer to that mix. We all need each other and we can't take on big government and big business alone.
What we need is a true "farmers union" that can stand up to the corporate theives that seem to run the whole food complex! Now that might come about through some sort of new generation co-op thing like Valuechain is proposing. Or it might come about by forcing our spineless politicians to look out for our interests instead of the food giants.
We're told all the time now that we live in a global economy and the market runs the show. Well who has benefitted from this philosophy? Was it the peasants down on the farm? Are we living the life of Riley? Is it such a great life that young people are flocking to the countryside to get in on the lucrative lifestyle? Someones getting rich on food but I don't think it is the farmer.

[rsomer]

rusty1: you said "There are a lot of very good feeders out there that would be happy to net $25 for every calf the cowboys produce"

I bet there are a lot of cowboys who would have been glad to get the $2,250,000 cheque from government that would have been received on average by each of the big feedlots in Alberta. The biggest would have received at least 3 times that.

The feedlot operators I know are just looking for the cheapest supply of calves, they don’t care from who or where the feeders come from. Rather than stand together with producers, the big feedlots are more interested in the economics of feeding and will go where the most money can be made. They very well may take their $2 1/4 million cheque with them to the United States once the border is open to live cattle.

I doubt very much if the large feedlots are going to see a need to support the Canadian cow calf producer once the fall run starts, they will try to buy our calves as cheap as possible. Without access to the U.S. market to keep the market honest this fall’s calf run will be like lambs going to slaughter. Cow calf producers need to realize that 100 feedlots control 75% of the feeding industry in Alberta. Retaining ownership of calves is the only alternative to selling them into a fall market with that little competition. Many cow calf producers will be forced to sell however because of cash flow constraints or lack of facilities for feeding their own.

I myself have no distrust of the feeding industry, I see how they work and they are completely predictable. Its all about economics, risk and profit. I used to fatten cattle and could do it again. I can’t compete with feedlot alley and the over 20,000 head feedlots much less the 80,000 head feedlots however because of the advantage they have with government supplied irrigation and the relationship they have with the packers which I can’t duplicate.

[ValueChainFX]

Well, we all know one thing for sure. The producer is the one that is going to suffer the most in this deal. Some have already recognized the need to pull together with one voice. From what we can see, that doesn't mean agreeing on all the issues in the industry. It does mean however, the government and big business will have control as long as they have the loudest voice.

We see the producer with a lack of choices and by taking a little more control of the supply chain (as in owning your own processing plant) you at least have a little more choice than you did before. This doesn't mean we can even imagine a competition between the big guys, what it does mean is that we can focus market some of our better cattle and build on what we have.

I guess we will see how this all shakes out in the end but for now, what lessons have we learned? How can we make things better?

[kato]

I have spoken to several who usually buy a lot of calves in the fall, (one cattle buyer, and one feedlot operator) and they simply are not planning on buying anything. Here in Manitoba, most who had cattle on feed on May 20 still have them. They are certainly not looking to buy more until those are gone.

Other than that "packer relationship", I think a small independant operator feeding their own cattle can certainly compete with the big boys as far as fattening their own calves. For one thing, we sure don't have the health issues that they have in the big lots. Death losses are significantly lower in a bunch of calves kept at home with their buddies under low stress conditions. It is not cheap getting auction calves bought, hauled, vaccinated, settled, and over their inevitable sicknesses. Gains for home raised calves can be just as good as the big lots get, if not better, as long as you do your homework, and get your rations right.

I personally don't think the "big" scenario is sustainable in the long run. Environmental issues come up, as well as disease issues. Spreading the feeding of cattle across many smaller operations, instead of concentrating in one spot is a better way to go, as far as I'm concerned. Imagine if this had been foot and mouth? It boggles the imagination to think about it.