Cattle markets experience a second perfect storm

Alberta Agriculture and Rural Development

Cattle markets in Alberta are experiencing the second perfect storm in a decade.

“In contrast to the first storm that appeared in the 2000s, this storm is raining big financial gains for the cattle producers who were able to persevere and ride out the last decade of tough times,” says Bruce Viney, risk management specialist, Alberta Agriculture and Rural Development (ARD), Olds. “Producers now looking to expand their herd are encouraged to take a hard look at past and future opportunities and assess them using a new calculator currently in the producer validation stage from ARD.”

Financial losses in the beef cattle sector over the past decade have mainly been blamed on the BSE crisis which severely weakened Alberta prices in relation to the rest of the world, says Viney.

“However, there was more to the disaster than just BSE. In fact, the crisis began on September 11, 2001, with the world trade center collapse. This terrorist event initiated reduced business travel and negatively affected restaurant beef demand which quickly turned cattle markets lower for the 2001 fall run. In 2002, Alberta experienced a widespread drought, feed shortages and extremely high hay prices that were exaggerated as a result of low 2001 hay inventories. This combination of events significantly weakened the financial position of many producers heading into 2003 when the bottom fell out of Canadian cattle markets.”

Following the May 2003 BSE announcement, severe financial strain began to mount on producers who had taken on debt or were just entering the cattle business, says Viney. “As borders gradually opened, selling prices were restricted by a large 40 per cent rise in the value of the Canadian dollar. Another wave in the seemingly endless storm of bad news was the long and severe drought in the southern U.S. This drought was a major contributor to low prices as prolonged cow herd liquidation added more beef to the supply chain.

"By 2009, even some long-time Alberta producers began throwing in the towel and many good quality mother cows were sold at very low slaughter price levels. Country of origin legislation (COOL) in the U.S. was just one more price insult that didn’t inspire confidence in the future. Lenders were generally not in the mood to finance cows and many producers were not prepared to see their retirement assets diminish even further. But for young producers entering the business or expanding their herds in 2010, the time could not have been better as the winds gradually began to change.”

Today, the storm is blowing the opposite way with a unique combination of positive factors driving cattle prices to record highs.

“Cow numbers are at very low levels and the start of herd rebuilding is keeping some heifers out of the beef supply. Competing meat supplies have been reduced due to years of losses in the hog sector and recent pork disease losses in the United States. Feed prices have also declined substantially from the exuberant levels of last few years which is causing a direct impact on our feeder cattle prices.

“In addition to the well-advertised supply situation, producers have seen positive price impacts from a Canadian dollar value that has declined by over 15 per cent since 2011. Consumer demand for beef has been very strong due to a better U.S. economy and relatively strong global economies. This rare combination of reduced supplies and strong demand is making 2014 a great time to be a rancher.”

As ranchers think about expanding their herds, planning for both opportunity and downside risk is very important for long-term survival, notes Viney. “Making an investment in breeding stock requires a vision of future prices and an effective long-term plan should things go worse than expected.”

ARD currently has a new tool for producers to use in calculating long-term returns to a beef cow or heifer investment. The tool is an Excel spreadsheet template that calculates production costs, cash flow and return to equity given various bred stock prices and future calf selling prices. A free test version can be obtained by sending a note to bruce.viney@gov.ab.ca.

“All producers are encouraged to look and learn from the past, assess the tremendous opportunities on the horizon, and make a plan to thrive and survive of the next decade,” concludes Viney. “But, most of all, producers are encouraged to enjoy the day. This storm has been a long time coming.”