31 August 2008

14 minute read

2009

Annual and Semi

2008

Annual

Semi-Annual

2007

Annual

Semi-Annual

Report Highlights

Reflecting the ongoing cost-price squeeze and weak returns, Canadian red meat production is forecast to fall by an estimated 1.5% in 2008 and an additional drop of 3.0% is forecast by the end of 2009. Cattle and hog inventories showed significant declines of 4.3% and 11.6% respectively at mid-2008 compared to a year earlier. A cost-price squeeze has adversely impacted the profitability of livestock production and about one in twelve cattle producers and one in five pig producers have exited the business.

These developments point not only to lower red meat production through 2009 but also to lower exports of live cattle and hogs to the United States. Total Canadian pork exports remain steady but Canadian beef exports are struggling to recover to a pre-BSE level. Ironically, red meat imports from the United States are increasing at a record pace reflecting a strong Canadian dollar and high demand among the Canadian retail and foodservice industries for U.S. red meats.

Executive Summary

Canada’s cattle industry has worked its way out of the inventory surge caused by the bovine spongiform encephalopathy (BSE) related trade disruption but still faces challenges. Five years after the first BSE trade disruption, Canada’s beef exports remain sluggish compared to their pre-BSE period. At the mid-point of 2008, there are considerably fewer cattle on fewer cattle farms reflecting reduced profitability as relatively weak market returns are insufficient to cover rising input costs. Year-end inventory is projected at 13.5 million head at the end of 2008, down slightly from 13.9 million head the year before. A further decline to 13.25 million head at the end of 2009 is forecast. The inventory decline combined with weak market prices are reflected in a recent report published by Statistics Canada’s that showed total farm cash receipts from livestock operations during the first six months of 2008 falling below crop receipts for the first time in 12 years.

For hogs, the industry continues its transition. The cost-price squeeze in the Canadian hog industry that has worsened over the past two years has resulted in a near record hog inventory drop and a dramatic loss in the number of hog farms in Canada. According to Statistics Canada, total Canadian hog numbers in 2008 showed the sharpest inventory decline in three decades while almost one in five hog farme rs exited the industry in the past year alone. The policy response by the Government of Canada (GOC) to the distressed hog industry includes provision of cash advances to cushion cash flow issues of the producers as well as a sow cull incentive program. By mid-July 2008, the sow herd had been culled by 7% thus approaching the ultimate goal of a 10% reduction.

Ironically, as financial hardship impacts Canadian cattle and hog producers, the stronger Canadian dollar has attracted increased imports of U.S. red meats by Canada’s retail and foodservice sectors.

USDA's interim final rule for Mandatory Country of Origin Labeling (COOL) is scheduled to come into effect on September 30, 2008. The initial reaction of Canada’s cattle and hog industries is that the flexibility of the COOL label categories will make the measure less onerous than initially perceived. Martin Rice, Executive Director of the Canadian Pork Council recently said, "As a result of the changes the made to the U.S. farm bill this year the record keeping requirements are much less onerous than what would have been the case under the 2002 farm bill.” In addition, recent reports that a coalition of U.S. livestock industry organizations has developed a unified approach to COOL compliance has encouraged Canada’s livestock industries. North American meat industry news services recently reported that 30 U.S. meat industry groups met and agreed on universal language (on COOL documents required) to facilitate how livestock origin documentation will move along the ownership chain in order to ensure that the meat covered by COOL is accurately labeled at the retail level.

The GOC official comments on COOL indicate several concerns including the possibility that the new rules may disadvantage imported product. The GOC indicated they perceive a lack of clarity in the display/segregation requirements at the retail level. The GOC will monitor closely and consider all options if COOL adversely impacts Canada.

Cattle Herd Continues to Decline

Cattle Herd

The market and trade disruption associated with the detection of bovine spongiform encephalopathy (BSE) in Alberta in May 2003 resulted in a forced retention of the Canadian cattle herd which peaked in mid-2005. Since that time, Canadian cattle numbers have declined steadily reflecting fewer breeding cattle on fewer cattle farms. In mid-August 2008, Statistics Canada published the latest cattle inventory for July 1, 2008. The data show the total cattle and calf inventory fell to 15.2 million head, a decline of 4.3% compared to one year ago. The beef cow inventory on July 1, 2008 was down 4.7% from a year ago, while the number of beef heifers for breeding and replacement were down 2% from July 1 a year ago. The number of cattle on feed operations declined 12.3% since last summer reflecting the strong increase in coarse grain prices. Over the past two years, the number of farms reporting cattle has stabilized at about 107,000 operations following a loss of 8,500 cattle farms the previous year. The total herd size at the mid-point of 2008 is slightly below the pre-BSE level. Based on present domestic market and trade prospects, Post forecasts the cattle herd to continue to decline into 2009, albeit at a lesser rate, and then stabilizing by 2010.

Beef and Veal Consumption

In 2007, per capita beef consumption reached 31.68 kilograms carcass weight basis, a 2.8% increase from 30.81 kilograms in 2006 and the first annual increase since 2003, the year of the first detection of BSE in Canada. Beef consumption increased moderately in 2003 after the BSE-related market disruption resulted in additional beef supplies on the Canadian market at reduced prices. For 2008, the prospect for increased beef supplies due to rising imports is expected to keep per capita beef consumption at 2007 levels despite fractionally lower Canadian beef and veal production.

Detections of BSE in Canada (14 cases since May 2003) have not caused concern among Canadian consumers who have shown a high degree of confidence in the country’s food inspection system. Canada’s cattle industry and Canadian food safety officials have been successful in reassuring beef consumers that the human health risk associated with BSE is extremely small and that Canada’s feed ban policies and BSE surveillance program help mitigate the health risk to the food supply.

The promotion of beef in Canada falls to the Beef Information Centre (BIC) which is the beef market development division of the Canadian Cattlemen's Association. BIC is governed by a committee of elected cattle producers. It has offices in eastern and western Canada to deliver BIC programs in Canada and the United States to processors, retailers, and the foodservice industry. A U.S. market development team is solely focused on the U.S. to maximize marketing opportunities under the Canadian Beef Advantage banner. Canada’s international marketing efforts for beef are carried out by the Canadian Beef Export Federation (CBEF). The CBEF is funded jointly by government and industry and is comprised of beef packers, processors, exporters, and key industry suppliers. Promotional activities are focused in Japan, South Korea, Taiwan, Hong Kong, China, and Mexico.

Cattle Market Prices

Cattle market prices at mid-2008 strengthened since the beginning of the year and recent weekly prices in late August and early September 2008 are moderately above last year’s level. As illustrated below, prices remain well below pre-BSE levels but many producers are optimistic that lower Canadian cattle inventories will lead to stronger market prices for the remainder of 2008 and into 2009. In addition, there are recent reports that unfavorable weather during the western Canadian grain harvest is increasing the volume of crops being downgraded to feed for quality reasons, which is putting downward pressure on feed grain prices. This is leading to renewed optimism among cattle producers looking for an improvement in profitability.

Trade

Beef and Veal Imports

Total Canadian imports of beef and veal, carcass weight basis, have advanced strongly during the first half of 2008 and are expected to reach an estimated 260,000 MT for the year, almost 7.5% above the 2007 level of 242,000 MT. Beef and veal import data on the accompanying PS&D are comprised of fresh and frozen beef and veal and prepared and/or preserved beef and veal, converted to carcass weight equivalents.

Canada operates a tariff rate quota (TRQ) on beef but it does not apply to imports from the United States, Mexico, and Chile under free trade agreement provisions. The global minimum access commitment for beef and veal is 76,409 MT within which there are two country-specific reserves: 29,600 MT reserved for imports from New Zealand and 35,000 MT reserved for imports from Australia. The balance of the TRQ, 11,809 MT (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. Beef imported in excess of the minimum access commitment incur the higher “over access commitment” rate of 26.5%. For the purpose of administering the beef and veal TRQ, the quota year is the calendar year. Following the detection of BSE in Alberta in 2003, the GOC moved to restrict the issuances of supplementary beef imports from non-NAFTA suppliers because of beef surpluses in Canada. As a result, imports form these suppliers have been lower since that time.

Canadian imports of beef from the United States, comprised roughly of 80% fresh and frozen and 20% prepared (i.e., luncheon meats, sausage, other prepared beef ) have risen steadily in the post-BSE era for a number of reasons. Stronger 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. Also, the stronger Canadian dollar has increased the purchasing power of Canada’s HRI sector, which prefers high quality U.S. beef (especially the higher end restaurant and hotels in Ontario). Fed slaughter has trended lower in Canada and there is anecdotal evidence that the major foodservice companies are importing more U.S. beef. Additionally, imports of U.S. ready-to-eat and prepared beef items continue to increase strongly and have doubled in the past ten years reflecting a growing demand for prepackaged and prepared beef by U.S.-based grocery superstores that have significantly increased their retail store presence in Canada in recent years.

As shown in the table above, Canadian imports of fresh and frozen beef and veal from the United States during 2007 (76,032 MT, product weight) surpassed their pre-BSE level (67,565 MT). The development is significant in that it occurred during a period of nearrecord cattle slaughter in Canada due to the BSE-related backlog in Canadian cattle numbers. As mentioned above, there is continued strong demand for U.S. beef in Canada in 2008. In the first six months of 2008, imports of fresh and frozen beef from the United States reached 46,779 MT, 56% higher that during that period a year ago and on pace to reach beyond 90,000 MT for the year. The trend is expected to continue into 2009 as Canada’s cattle herd and slaughter levels continue to contract and if the Canadian dollar remains strong.

Beef and Veal Exports; Live Cattle Trade and MRR2

Canadian beef exports have not recovered to their pre-BSE level. In 2007, Canadian fresh and frozen beef and veal exports totaled 323,757 MT product weight, 30% below the 462,155 MT exported during 2002, which was the last full calendar year of beef trade unaffected by the first detection of BSE in Canada in May 2003. The decline of Canadian beef export trade since BSE has been shared relatively equally between lower exports to the United States and to the rest of the world. The U.S. share of total Canadian beef exports has remained relatively constant, 83.5% during 2007 versus 82.7% of total in 2002. Among former major destinations that currently accept Canadian beef, Japan has proven to be the slowest export market to recover. Canadian beef exports to Japan in 2007 were only 25% of their pre-BSE level reflecting increased competition and the stronger Canadian dollar. Although Canada was categorized by the World Organization for Animal Health (OIE) in May 2007 as a Controlled Risk Country for BSE, many trading partners continue to maintain partial or complete bans on Canadian beef, mostly notably, South Korea which was the fourth most important export market for Canadian beef in 2002. Although Canadian beef producers were hopeful that recently gained U.S. access to South Korea’s beef market would bode well for Canada, the optimism was overtaken by events that included public riots over the South Korean government’s recent decision to allow U.S. beef. As a result of the political sensitivity of the issue surrounding the return of U.S. beef to South Korea, CFIA officials claim there is little enthusiasm by South Korea to hammer out a beef deal with Canada. It appears unlikely that Canadian efforts to reestablish beef market access in South Korea will regain any momentum until late 2008 at the earliest.

As shown on the table below, Canadian beef exports rose a modest 1.4% during the first six months of 2008 compared to the same period a year ago mostly due to increased exports to Mexico and the Philippines. Total Canadian beef exports to the United States in the January- June period of 2008 were 1.5% lower than the previous year. In November 2007 USDA implemented Minimal Risk Rule 2, which resulted in renewed access for Canadian “over thirty month” (OTM) cattle (i.e., born after March 1, 1999) and for OTM beef. There has been no spike in Canadian exports of OTM beef to the United States as some industry observers had anticipated but there has been renewed demand among U.S. packers for live Canadian OTM slaughter cows during the first half of 2008, marking a return closer to the pre-BSE pattern when Canada was regularly exporting about 250,000 mature slaughter cows annually to the United States.

For 2009, supplies of Canadian beef for export are expected to be tighter reflecting the general decline in the cattle inventory, the lower number of finished cattle, and increased exports of live cattle, both for slaughter and for feeding, to the United States. Any increase in Canadian beef exports is more likely to come from Canadian efforts to regain access to lost international beef markets rather than from increased exports to the United States.

USDA's interim final rule for Mandatory Country of Origin Labeling, is scheduled to come into effect on September 30, 2008. Current beef industry reaction in Canada is that U.S. meat processors and retailers will have some flexibility under the COOL label categories and that the measure may not be as onerous as initially perceived. Ultimately, it will be U.S. packer and retailers that determine how easily they can incorporate Canadian origin live animals and beef into their compliance requirements with COOL. The current mood suggests that mandatory COOL will not have a significant impact on the level of imports from Canada but that associated COOL compliance costs in the United States could be reflected in price offerings for Canadian origin product.

Policy

Canada Confirms 14^th Case of BSE

On August 15, 2008, the Canadian Food Inspection Agency (CFIA) confirmed bovine spongiform encephalopathy (BSE) in a six-year-old beef cow from Alberta. It was the 10th case in the province of Alberta. Three were in British Columbia and one was in Manitoba. Concerning the recent finding, the animal’s birth farm has been identified, and an investigation is underway. The CFIA is tracing the animal's herdmates and examining possible sources of infection. According to the CFIA, the age and location of the infected animal are consistent with previous cases detected in Canada. The case was detected through the Canada’s BSE surveillance program and the CFIA said that no part of the animal’s carcass entered the human food or animal feed systems. Canada is a Controlled Risk country for BSE, a designation it received in May 2007 by the World Organization for Animal Health (OIE). The finding of this latest case was not expected to affect exports of Canadian cattle or beef but Mexico took immediate action against imports of breeding cattle from Canada (see next heading).

Mexico Bans Alberta Breeding Cattle

Mexico has banned imports of Alberta breeding cattle following Canada’s announcement of its 14^th case of bovine spongiform encephalopathy (BSE) in mid-August 2008. Canada only regained access to the Mexican bovine breeding ma rket in February 2008 and a spokesperson for Canada’s cattle industry expressed disappointment with the action by the NAFTA partner. Mexican authorities are reportedly describing their action as a temporary measure pending a risk assessment. Canadian and Mexican officials have initiated technical discussions. Prior to its first case of BSE in May 2003, Canada exported a few hundred head of bovine breeding animals annually to Mexico. The U.S. market for Canadian breeding cattle, born after March 1, 1999, opened in November 2007 under implementation of USDA’s Minimal Risk Rule 2. According to official Canadian trade statistics, Canada exported 12,615 head of breeding cattle to the United States during the first six months of 2008, valued at $19 million.

Feed Ban Policy Too Strict Say Cattlemen

Canada’s cattle industry is lobbying the Canadian government to ease the feed ban rules imposed last year and harmonize with U.S. feed ban rules. In July 2007 Canada implemented its enhanced feed ban rules that ban BSE specified risk materials, commonly known as SRMs, from animal feed, pet food and fertilizers. These materials had been banned from cattle feed since 1997. SRM and dead cattle must also be disposed of under strict rules. The beef industry alleges that Canada’s SRM policy imposes about C$39 per head in extra costs on Canadian packing plants, which makes them uncompetitive with their U.S. counterparts and it blames the recent closure of meat processing plants on Canada’s stricter rules than the U.S. rules scheduled to go into effect in 2009.

Further Reading

-

You can view the full report by clicking here.

List of Articles in this series

September 2008