AGRI Committee Report

Domestic and Export Markets for Canadian Beef and Cattle (1987-2002)

Since the late 1980s, the Canadian cattle and beef industry has grown to an estimated $7.7 billion in annual sales. This expansion was primarily driven by exports to the United States, as it was stimulated by policies favouring freer trade (through the implementation of the FTA and the NAFTA) and a declining Canadian dollar currency exchange value. Domestic consumption of beef products, on the other hand, remained either stable or declined over the period (see Figure 1.1).

Figure 1.1
Canadian per Capita Meat Consumption
1970-2002

Source: Canfax, George Morris Centre

Indeed, total cattle and beef exports were $4 billion in 2002, the equivalent of $11 million in sales per day (see Figure 1.2). These exports consisted of $1.8 billion worth of cattle and calves and $2.2 billion in beef products. Approximately 60% of Canada’s production was exported in 2002, with the United States accounting for 80% of Canadian beef exports and almost 100% of cattle exports.

Figure 1.2
Canadian Beef and Cattle Exports
1982-2003

Source: Canfax, George Morris Centre

The export market has enjoyed phenomenal growth since the late 1980s. In the early 1980s, the value of Canadian cattle and beef exports consistently hovered just below the $500-million level. In the 15-year period that followed the 1988 implementation of the FTA, Canadian cattle and beef exports experienced an eight-fold increase, the equivalent of a 16.3% annual compound growth rate. The FTA was clearly the principal stimulus for this strong performance, but the declining value of the Canadian dollar vis-à-vis the U.S. dollar — from US85¢ in 1990 to US64¢ in 2002, or about a 25% decline in value over the period — also played an important role.

Post-BSE Beef and Cattle Markets

The Canadian beef and cattle industry was enjoying record demand in 2003. However, the export market, which had begun the year in strong fashion, started to show signs of weakness in late March and early April, the likely consequence of a rising Canadian dollar. Bad soon turned to worse when, on 20 May 2003, a single case of BSE was found in Alberta. Based on this finding, borders across the industrialized world were immediately closed to Canadian cattle and beef products. Canadian beef exports plummeted to virtually zero throughout June, July and August 2003, but gradually recovered through September and October with the lifting of the U.S. embargo on Canadian boneless beef cuts from cows no more than 30 months old. By November 2003, beef export values had returned to pre-BSE crisis levels (see Figure 1.3), which is somewhat surprising given the 20% appreciation of the Canadian dollar vis-à-vis the U.S. dollar in the period. This superior export performance can only be explained by the comparative advantage bestowed upon Canadian packers relative to U.S. packers through the depressed Canadian cattle prices needed to relieve the excess supply situation created by the U.S. embargo on Canadian cattle. Nevertheless, due to lost sales during the summer months, beef product exports in 2003 were well below 2002 levels. In fact, between January and November last year, Canadian companies exported $1.3 billion worth of beef products, down 36% from $2.0 billion during the same 11 months of 2002.

Figure 1.3
Canadian Exports of Beef Products — 2002-2003

 Source:    Statistics Canada, Catalogue no. 11-621-MIE — No. 010, Mad Cow Disease and Beef Trade:
An Update, p. 2

Figure 1.4
Canadian Cattle Exports — 1984-2003

     Source: Canfax, George Morris Centre

Unfortunately, cattle exports remain subject to the U.S. import embargo. As a consequence, Canadian cattle exports of 512,353 head before 20 May 2003 will represent the year’s exports, which on an annual basis are down more than 70% from 2002. For a year that started off with so much promise, the year-end data for 2003 represent the poorest export performance in more than 15 years.

Cattle Prices (2002-2004)

The prices for live cattle are set either by open- or sealed-bid auction. The auction companies are independent from those who buy and sell cattle at their auctions; they receive a percentage of auction receipts for their efforts. According to Canfax data, in the first nine weeks of 2004, Alberta feeder steers (600-700 lb.) sold, on average, for $83.22/cwt (per hundred pounds). In the same period in 2003, Alberta feeder steers (600-700 lb.), on average, sold for $126.33/cwt, but throughout the year they averaged $119.77/cwt. The prices of Alberta feeder steers post-BSE have, therefore, declined about 34% from one year earlier. For Alberta cattleman, these prices translate into a drop from $758 per 600-lb. steer in early 2003 to $499 per 600-lb. steer in early 2004.

Figure 1.5
Alberta Weekly Fed Steer Prices — 2002-2004

    Source: Canfax Spreadsheets, George Morris Centre

Also according to Canfax data and as shown in Figure 1.5, the prices paid for Alberta fed steer in 2002 varied between $90.25 and $114.22/cwt in 2002. The average price for 2002 was $98.82/cwt. Applying this price against the average slaughter weight of 1,300 pounds, a fed steer fetched, on average, $1,284 in 2002. From 1 January to 20 May 2003, Alberta fed steer prices ranged from $105.08 to $117.52/cwt and averaged $111.38/cwt, meaning an average fed steer price of $1,448. So the cattle market was booming in terms of the prices paid to feedlots before the BSE crisis struck. From 20 May 2003 to the end of that year, Alberta fed steer prices ranged from $35.06 to $89.36/cwt and averaged $65.96/cwt, which translates into an average fed steer price of $857. Thus, in the post-BSE period, Alberta feedlots suffered a 33% decline in the price of a steer from 2002 and a 40% decline in price from the pre-BSE period in 2003.

Canfax data indicate that the prices for Alberta dairy cows (D1 and D2) were faring well before the BSE crisis struck, up from an average price of $57.04/cwt in 2002 to $58.49/cwt in the first five months of 2003. This represents an increase of 2.5% (or 6% per annum). However, post-BSE prices in 2003 averaged $21.71/cwt, representing a decline of 63% from the first five months in 2003.

While still well below the prices paid in the pre-BSE period, cattle prices have recovered somewhat in 2004. The average price paid for Alberta fed steer in the first two months of 2004 was $82.29/cwt, representing a 25% increase over the post-BSE 2003 average price. The average price paid for Alberta dairy cows (D1 and D2) in the first two months of 2004 was $23.72/cwt, representing a 9.3% increase over the post-BSE 2003 average price.

Wholesale Beef Prices (2002-2004)

Wholesale prices for various beef cuts — the prices packers and further processors receive — vary tremendously from cut to cut or product to product. The prices of the various beef cuts, however, provide a very narrow picture on the revenues or the value received by packers. Notably, before the BSE crisis struck, a slaughter cow weighing 1,387 pounds provided about 625 pounds of domestically consumed meat, 580 pounds of by-products (i.e., hide, offal, bone meal, etc.) and 182 pounds of waste.¹ After the detection of BSE in Canada, processing practices were changed in favour of safety, and these changes, along with the internationally applied embargo on Canadian beef products, have resulted in a lower average product-to-waste ratio per slaughter cow. Moreover, since the prices of the various beef cuts may, at any one time, fluctuate in opposite directions, a narrow focus on the price of cuts may (and likely will) be misleading without some knowledge of the carcass yields. A composite price or value that comprises all beef cuts, weighted according to their yields, and by-products is far more informative.

To this end, the George Morris Centre has constructed such a composite model of the wholesale value of beef products. The model provides a “cut-out” value (see Figure 1.6), meaning the total value, at the packer/wholesale level, of the various cuts and products that make up a carcass of beef. The cut-out is constructed by combining the value or price of each individual cut of beef and weighting the cut by its typical yield from the various primals (i.e., hip, loin, chuck and rib). The combination of the cut prices and their yields together is the beef cut-out. The yields are based on typical or standard Canadian cutting specifications. The cut prices are based on information from the beef trade and from packer price sheets. The cut prices are obtained from across Canada and the cut-out value is taken back to a southern Alberta basis.

Figure 1.6 shows the average value received by packers for AAA cut-out from the first week in 2002 to the eighth week of 2004. The graph shows that packers fared better in 2003 until the finding of BSE on 20 May than in 2002. The AAA cut-out value in the first part of 2003 fluctuated between $180 and $215/cwt. Through the summer months of 2003, however, the AAA cut-out value declined and then stabilized at $140/cwt, representing a 27% drop from the preceding $190 cwt-trend level. By the fall of 2003, the wholesale AAA cut-out value returned to 2002 levels of about $190/cwt, but values received by packers have declined once again in the first two months of 2004.

Figure 1.6
Canadian Weekly Cut-out Values
AAA — 600-750 lbs

Source: Canadian Box Beef Report, George Morris Centre

Retail Beef Prices (2002-2004)

Retail prices for beef products performed much like wholesale prices throughout 2003 and so far in 2004. While fluctuations in wholesale prices of tenderloin, striploin and top-butt were more moderate than fluctuations in cattle prices throughout 2003, retail price fluctuations were more moderate still. As shown in Figure 1.7, retail prices for beef products declined 14% between May and September 2003, but have trended up since then. September 2003 beef prices were the lowest since January 2001.

Figure 1.7
Retail Price Index of Beef Products in Canada — 2002-2004

     Source: Statistics Canada, Mad Cow Disease and Beef Trade: Un Update, Cat. No. 11-621 — MIE, p. 6

Retail-Wholesale-Farm-gate Price Spreads

The difference in prices received by the packer and the cattleman is called the wholesale-to-farm-gate price spread. It generally reflects the packer’s unit costs of trimming, boning, shrinkage, cutting loss, packaging and transportation, and, over the longer term, it provides a risk-compensated profit margin. The difference in prices received by the retailer and the packer is called the retail-to-wholesale price spread. It generally reflects the retailer’s unit costs of retail trimming, boning, packaging, transportation, store overhead, shrinkage and cutting loss, and, over the longer term, it provides a risk-compensated profit margin. In the short term, however, there is no guarantee of profit for packers or retailers, and these price spreads may result in profits or losses.

As noted above, retail prices have undergone a slight decline since the BSE crisis began; wholesale prices, as represented by the composite AAA cut-out values, showed a 27% decline in the immediate aftermath of the BSE crisis but have since recovered to pre-BSE levels; and Alberta fed steer prices declined about 40% throughout the summer of 2003 but have regained about 20% since then. These data suggest rising retail-to-wholesale and wholesale-to-farm-gate price spreads. The first graph of Figure 1.8 confirms both these trends. The wholesale to farm-gate price spread has increased from about $70/cwt in January 1999 to more than $100/cwt in December 2003, while the retail-to-wholesale price spread has increased from about $220/cwt to more than $320/cwt in this same period.

Figure 1.8

Retail-Wholesale-Fed Steer Live Price Spreads		Fed Steer Price as a % of the Retail Price in Canada

Source: Canfax, George Morris Centre

The second graph demonstrates the declining farm-gate price of cattle as a percentage of the retail price of beef — a simple arithmetic consequence of the above-noted rising price spreads. The Alberta fed steer price, which in January 1999 represented 25% of the retail price of beef, represented only 15% of the retail price in December 2003. At the height of the BSE crisis, the fed steer price fell to 7% of the retail price. However, while both graphs demonstrate the plight of cattlemen relative to packers and retailers since the BSE crisis struck — confirming what many Canadians suspected — the graph also points out that this pattern has been transpiring for more than four years — long before a single case of BSE was found in Canada.