30 October 2007

14 minute read

Report Highlights:

Lower production levels, a development forecast to extend throughout 2008, currently characterize Canada's beef and pork industries. Beef production in 2007 is expected to reach about 1.345 million metric tons (MMT), about 3.0% below the 2006 level. Pork output will fall about 2.5% from 1.898 MMT to about 1.850 MMT in the current year. These industries are deeply concerned about U.S. Country of Origin Labeling legislation that they feel could require U.S. buyers to segregate Canadian meat in the U.S. market resulting in a strong disincentive to import it. U.S. beef exports to Canada have returned to their pre-BSE level. The development is significant in that it occurred during a period of near-record cattle slaughter in Canada and demonstrates strong demand for U.S. beef in Canada.

Executive Summary

THIS REPORT DOES NOT CONTAIN OFFICIAL USDA DATA

The inventory data in this report has been adjusted to align with the 2006 Census of Agriculture data released by Statistics Canada on May 16, 2007. The data contains revisions back to the last Census (2001) to many of the inventory elements of cattle and hog supply.

• Canadian beef and veal production is 2.5% lower in the first three quarters of 2007 compared to that period a year ago. A lower cattle inventory and prospects for increased exports of live cattle to the United States point to a further reduction in total beef and veal output during 2008 of about 3%.
• On September 14, 2007, USDA announced Minimal Risk Rule 2 (MRR2), a final rule that allows for the importation from Canada of live cattle and other bovines (i.e., bison) for any use (including breeding) born on or after, March 1, 1999. The action is not expected to result in a flood of older live cattle imports from Canada after its scheduled implementation on November 19, 2007.
• Post forecasts that by January 1, 2008, Canada’s total cattle inventory will decline close to the pre-BSE level of 13.8 million head, a reduction of more than 1.0 million head from the opening inventory at the beginning of 2005, the year numbers hit their peak.
• U.S. exports of beef and veal to Canada returned to their pre-BSE level during 2007. The development is significant in that it occurred over a period of near-record cattle slaughter in Canada and demonstrates strong demand for U.S. beef in Canada.
• Canadian beef exports have not recovered to their pre-BSE level. Present Post analysis is that Canadian beef exports in 2008 may struggle to meet 2007 levels due to a combination of economic factors.
• Following several successive years of expansion, Canada’s hog inventory peaked during 2005 at 15.2 million head. Since that time, lower Canadian exports of pork, declining slaughter capacity, and reduced profitability for producers have combined to result in the total hog inventory slipping to 14.7 million head on July 1, 2007, 2.5 % below a year earlier on that date and 3.3% below the peak of 15.2 million at July 1, 2005
• Post forecasts total Canadian pork production during 2007 at about 1.850 MMT, down 2.5% from the 1.898 MMT produced in 2006. For Canada’s hog processing industry, the past 18 months has been characterized by several factors culminating in lower pork production.
• Canadian hog producers exported a record 8.8 million live hogs to the United States during 2006 and are on pace to export about 9.4 million head during 2007 based on trade data for the for the first seven months of the year. Exports in 2008 may be higher again.
• Canada’s beef and pork industries are deeply concerned about U.S. Country of Origin Labeling legislation in that they fear COOL provisions could cause U.S. packers and purveyors of meat to be required to segregate Canadian meat in the U.S. market resulting in a strong disincentive to import Canadian slaughter animals and meat. They believe that significant trade disruption could result in substantial economic loss for the Canadian livestock and meat industry and claim that Canada would be justified challenging COOL in its present form at the WTO and under NAFTA.

Production

At the mid-point of 2007, the Statistics Canada livestock survey revealed that Canada’s cattle population was continuing to contract. The herd peaked in 2005 reflecting the disruptions surrounding the BSE incident of May 2003 that severely backlogged the normal patterns of Canadian cattle marketing and trade. Post forecasts that by January 1, 2008, Canada’s total cattle inventory will decline close to the pre-BSE level of 13.8 million head, a reduction of more than 1.0 million head from the opening inventory at the beginning of 2005.

Year-over-year cattle slaughter to the third week in September 2007 is 2.5% below the corresponding period last year. For the balance of the year, present prospects point to about a 3.0-3.5% decline in total cattle slaughter and beef production compared to 2006. Total Canadian beef and veal output will reach about 1.345 MMT compared to 1.391 MMT during 2006. As highlighted in the Semi-Annual Livestock Report, CA7010, March 2007, Post continues to hold that the ability of the Canadian cattle industry to recapture pre-BSE trade levels for cattle and beef will dictate the future size of the cattle herd. Since that report, there has been added pressure on the industry from the fast rise of the value of the Canadian dollar and from rising feed costs which are eroding the prospects for profitability.

Production Outlook

For 2008, the decline in the cattle inventory, live cattle export trade, pressure on international exports reflecting the strength of the Canadian dollar, and the prospect of high feed costs injecting a disincentive to cattle feeding are expected to result in a further decline in total Canadian beef output in the range of about 3.0-3.3% from the current year’s level. Assuming that MRR2 (see next page) goes into effect on November 19, 2007, there is a possibility of increased live cattle exports (i.e., over 30 months) during the final weeks of 2007 and throughout 2008 and increased exports of beef from OTM cattle. However, the estimates in this report do not presume that the expanded access policies are in place.

MRR2 and the Level of Canadian Live Cattle Exports to the U.S.

On July 18, 2005 the U.S. border re-opened to under 30 month old live cattle imports from Canada under the USDA’s initial Minimal Risk Rule. It marked the first time in more than two years, since Canada’s BSE incident of May 2003, that Canadian live cattle were eligible to enter the United States. The action went a long way to ease the situation of a burgeoning cattle inventory in Canada due to the BSE-related border closure.

On September 14, 2007, USDA announced Minimal Risk Rule 2 (MRR2), a final rule that allows for the importation from Canada of live cattle and other bovines (i.e., bison) for any use (including breeding) born on or after, March 1, 1999, a date which APHIS has determined to be the effective enforcement of Canada's ruminant-to-ruminant feed ban. The final rule is scheduled to become effective November 19, 2007. There is keen interest as to whether the MRR2 would result in a flood of Canadian cull cattle exports to the United States. The following are some of Post’s observations on the issue.

Normally, about 500,000-600,000 mature milking and breeding cattle are culled from Canada’s breeding cow herd on an annual basis. According to a study commissioned by the Alberta Beef Producers, in the period prior to May 2003 (i.e., pre-BSE), it was common for Canada to export, on average about 250,000 live slaughter cows per year to the United States. Following the U.S. border BSE-related border measures, Canada had importantly increased its slaughter capacity for cull animals by 2004 and reduced imports of non-NAFTA beef (i.e., the similar processing beef that cull animals yield). Therefore, under present policies, the number of Canadian cull cattle likely to enter the United States under MRR2 is lower than its pre-BSE cohort. In addition, many Canadian cull cattle are currently older than eight years and the age requirement in the rule and would be a disqualifying factor to their export eligibility. As the March 1, 1999 date fades in time, more cull cattle will become age qualified but not necessarily age verified, another rule requirement. Canada’s mandatory ID program only became effective in July 2002. Although Canadian cattle prices are expected to be under continued pressure from a stronger Canadian dollar, Canadian cow prices are forecast to strengthen when the MRR2 rule goes into effect on November 19, 2007. The more likely development is increased Canadian exports of over thirty month (OTM) beef to the United States rather than a flood of live cull cow exports.

The Rise and Fall of the Beef Cow Herd

Statistics Canada data show Canada’s national cattle herd continued to decline in 2006, falling by 525,000 head to 14.1 million head on January 1, 2007 down 3.5% from a year ago on that date. Six months later, the StatCan August 2007 survey of the beef breeding herd suggests that the number of beef cows on July 1 2007 was 5.1 million head, down at least 323,000 head from the peak in 2005 and Post forecasts that they will decline to about 4.9 million head by January 1, 2008.

Consumption

Cattle Prices and the Stronger Canadian Dollar

In mid-September 2007, the Canadian dollar briefly traded at par with the U.S. dollar, a level not seen for thirty years. From its level at January 2005 of US$0.816, the Canadian dollar has risen 22.5% to US$1.001 by mid-September 2007. The development puts downward pressure on Canadian cattle market prices which tend to be established in the United States. In periods of a weak Canadian dollar, U.S. market prices returned a premium to Canadian sellers who were paid in U.S. dollars. With a Canadian dollar at par, cattle market prices in Canada reflect discounts at least equal to handling and freight to compete in live cattle and beef markets in the United States.

Impact of Corn Prices and Ethanol Production; High Feed Costs

According to Agriculture and Agri-Food Canada’s (AAFC) Grains and Oilseeds Outlook, September 17, 2007, Canadian corn production is estimated to increase by 18% to a record 10.6 MMT due to higher area seeded. Food and industrial use in 2007-08 is forecast to increase by 34%, mainly as a result of increased ethanol production. AAFC forecasts corn for feed use to increase by less than 3% during 2007-08. Canadian cattle producers are concerned about spikes in grain corn prices from the increased competition for corn from the ethanol sector. Higher U.S. corn prices, related to ethanol sector developments, set the price floor in Canada and the resultant higher Canadian corn prices act as a disincentive to cattle feeding. Since the dramatic rise in corn prices about a year ago, there has been downward pressure on feeder cattle prices as those engaged in cattle feeding weigh their profitability prospects.

In western Canada, barley prices are 50% greater than a year ago and Alberta feeder cattle prices in early September 2007 are under pressure. The number of cattle on feed in Alberta and Saskatchewan on September 1, 2007 declined 1% from a year ago. There is anxiety in the cattle feeding industry that the production of ethanol, a fuel that can be produced from grain or other plant material, could cause the cost of feed to increase due to increased competition for the raw product(s). However, there is also increasing interest in distiller’s grains (a by-product of the ethanol industry) as cattle feed, but their application in cattle feeds is not widespread. In the future, as the capacity of the western Canadian ethanol industry increases, the integration of the cattle industry and the ethanol industry, and the utilization of distiller’s grains is expected to increase.

Per Capita

Canadian per capita beef consumption advanced to 32.81 kilograms in 2006, up 2.1% from the previous year. There is no evidence that beef’s popularity among Canadian consumers has been adversely impacted by the detection of ten cases of BSE in Canada since May 2003 (the latest in April 2007). In fact, comparing beef per capita consumption with chicken since 2002, the year prior to the first BSE detection, Canadian beef disappearance advanced 3.6% over the five year period ending 2006 while per capita chicken disappearance rose 3.5%. Pork per capita consumption over the same time period slipped 16.2%.

Trade

Imports

In product weight terms, U.S. exports of beef and veal to Canada during 2007 have recovered to their pre-BSE level. The development is significant in that it occurred during a period of near-record cattle slaughter in Canada due to the BSE-related backlog in Canadian cattle numbers. Post believes that the strong demand for U.S. beef in Canada is related to the changes in the slaughter and beef marketing pattern in Canada that was profoundly disrupted by BSE. The Canadian industry had to absorb all the cull cattle and over 30 month beef that it could not export to the U.S. Also, fed slaughter in Canada trended lower and as the Canadian dollar strengthened, the increased purchasing power of those in the HRI sector who prefer high quality U.S. beef (especially the higher end restaurant and hotels in Ontario, where the preferred menu offerings are high grade U.S. steaks and cuts) resulted in increased purchases of U.S beef. In addition, there is anecdotal evidence that the major foodservice companies are importing more U.S. beef.

Following the detection of BSE in Alberta in 2003, the GOC moved to restrict the issuances of supplementary beef imports form non-NAFTA suppliers (see Marketing Section for summary of Canada’s beef TRQ). The chart below illustrates historic U.S. beef exports to Canada. The recent spike from other suppliers mostly reflects product imported from Uruguay.

Presently, the prospects for a further increase in the Canadian demand for U.S. beef during 2008 is promising. Canada’s cattle inventory is lower and fed slaughter levels are expected to be down; high corn prices in Ontario could impact cattle feeding activity in Canada’s third most important cattle raising province and the stronger Canadian dollar is expected to increase U.S. beef purchases by the foodservic e and retail sectors.

Exports

The chart below illustrates that Canadian beef exports have not recovered to their pre-BSE level. Seven months of trade data for 2007 show total Canadian beef and veal exports as flat compared to a year ago at that time. With all of Canada’s major markets accepting or partially accepting Canadian beef under their BSE import measures, it would appear that any Canadian successes at lifting BSE-related restrictions in other markets would have only minor impact on total beef exports. For 2008, prospects do exist under MRR2 to export additional beef from older animals to the United States, but this prospective development could be significantly hindered by the increase in the value of the Canadian dollar, resulting in Canadian beef being less competitive in all markets. Present Post analysis is that total beef exports in 2008 may struggle to meet 2007 levels.

Policy

Enhanced Feed Ban

In June 2006, the Canadian Food Inspection Agency announced it would attempt to eradicate BSE from the domestic cattle herd by preventing 99% of any potential BSE infectivity from entering the feed system. Canada’s “Enhanced Feed Ban” (EFB) became effective on July 12, 2007 and the regulation bans specified risk materials (SRM) from all livestock feeds, pet foods, and fertilizers. Canada already protects human health by applying a similar SRM (removal) policy for beef for human consumption. SRMs are the cattle parts that are most likely to contaminate feed with the BSE infective agent. To keep SRMs out of the feed chain, Canada will place strict new requirements on the handling, transport, and disposal of SRMs. This action will affect cattle producers, slaughter plants, renderers, feed manufacturers and fertilizer and pet food plants. While it is largely aimed at introducing new domestic controls, the development is an important concern to the U.S. pet food industry because Canada is the industry’s number one export market. U.S. pet food sales (dog and cat) to Canada during 2006 reached a record $393 million and accounted for 37% of total U.S. pet food sales worldwide. Under Canada’s EFB, only U.S. pet food that is free from SRM will be permitted entry. USDA’s Animal and Plant Health Inspection Service and CFIA are presently exchanging dialogue on Canada’s new pet food import requirements.

Country of Origin Labeling (COOL)

Canada’s beef and pork industries are deeply concerned about U.S. Country of Origin Labeling legislation a provision of the U.S. Farm Bill which was postponed twice before but which is now scheduled to become effective by September 2008. Chicken and other poultry are not covered by the legislation. The fish and seafood provisions are already in place. Earlier this year, Canada’s beef and pork industries formed the Canadian Livestock Producers Against COOL and issued a press release calling on the Canadian government to convince the US to repeal or substantially revise the mandatory COOL provisions of the U.S. Farm Bill. Beef and pork producers in Canada are concerned that the COOL provisions could cause U.S. packers and purveyors of meat to be required to segregate Canadian meat in the U.S. market resulting in a strong disincentive to import Canadian slaughter animals and meat. They believe that significant trade disruption could result in substantial economic loss for the Canadian livestock and meat industry and claim that Canada would be justified challenging COOL in its present form at the WTO and under NAFTA.

Marketing

Canada’s Beef and Veal TRQ

Under NAFTA, there is no duty on U.S. beef and there are no quantitative controls on exports of U.S. beef to Canada. Canada does limit imports of non-NAFTA beef under a tariff rate quota system. Imports of non-NAFTA beef are limited to Canada’s global minimum access commitment of 76,409 metric tons, within which there are two country-specific reserves: an allocation of 29,600 metric tons reserved for imports from New Zealand (NZ) and an allocation of 35,000 metric tons reserved for imports from Australia. The balance of the TRQ, 11,809,000 kilograms (known as the MFN reserve), is reserved for imports from all other eligible suppliers, including those from New Zealand and Australia once their country-specific allocations are filled. Goods imported in exc ess of the minimum access commitment may incur the higher “over access commitment” rate of duty, which is 26.5%.

Further Reading

- You can view the full report, including tables, by clicking here.

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