International beef and cattle trade has been the most cussed and discussed issue among U.S. cattle producers for the past decade. The consternation over imports reached fever pitch last spring with the debate over resumption of Canadian fed- and feeder-cattle imports.
Doomsday forecasts had many believing the combined effects of post-BSE lost export markets and a flood of imports would return the industry to a crisis position.
But, by early fall 2005, fed-cattle owners were again testing the $90/cwt. benchmark — far from the low-$70s feared by some within the cattle industry.
To get a perspective on current import-related price relationships, BEEF chatted with two Montana State University agricultural economists. For more than 10 years, Gary Brester and John Marsh have researched and analyzed the effects of beef and cattle trade and its impacts on the U.S. cattle industry.
BEEF: Significant reductions in cattle prices were expected following reopening of the Canadian border to feeder- and fed-cattle imports. But, since then, we've seen increases in prices for those classes of cattle. How do you explain it?
Brester: We predicted a $1-$2/cwt. reduction in fed-cattle prices and $3-$4/cwt. reduction in feeder calves. That's expected because we knew U.S. consumers would have access to more grain-fed beef.
In fact, we saw prices drop to about the range we predicted for about 2-3 weeks after live-cattle imports resumed, but they recovered quickly. This underscores the point that, in addition to trade issues, other factors also influence cattle prices.
Recent cattle prices are the result of strong market fundamentals: healthy consumer demand for beef and short cattle supplies. Corn prices are still reasonable, lower than many predicted earlier this year. Interest rates are still relatively low. While energy prices are increasing, the major factors for a feedlot are still prices of corn, cattle supplies and interest rates.
BEEF: Feeder cattle prices are typically seasonal. How do prices across the country this fall compare to those of a year ago?
Marsh: Fed- and feeder-cattle prices were slightly higher on Oct. 1 this year relative to a year ago. It's apparent that, in addition to trade with Canada, other factors influence beef and cattle prices.
Brester: The biggest price impact of the Canada border reopening occurred in Canada. Canadian packers were able to purchase fed cattle from Canadian feedlots at relatively low prices while the border was closed. The fact other countries also closed their borders to Canadian beef exacerbated that issue. The Canadian industry exports a significantly higher proportion of their production relative to the U.S.
Once the border opened, Canadian cattle feeders were provided a “new” outlet for their animals. Some thought the majority of Canadian fed cattle would go to the U.S. However, Canadian packers couldn't allow their plants to slow or shut down. So, they bid competitively with U.S. packers to keep those animals in Canada.
Marsh: Indeed, far fewer cattle were actually exported to the U.S. in the past few months relative to a couple of years ago. Canadian cattle exports from July 18-Oct. 1, 2002 (the last “normal” trading year), were only 37% of the cattle they exported in 2005. This decline is a result of the 20-25% increase in Canadian packing capacity, coupled with lower Canadian cattle inventories.
BEEF: If the Canadians have increased their packing capacity, and we're bringing in more beef, doesn't that serve to impact prices on this side of the border?
Brester: U.S. beef prices are impacted by available supplies. Essentially, the Canadian fed-cattle industry adds to this supply if U.S. consumers have access to that beef. One can expect similar price impacts whether we import beef or import cattle.
We've experienced plant slowdowns, even closures, at U.S. facilities that historically augmented their supplies with Canadian imports. Decreased efficiency translates to higher costs for those packers. They, in turn, can't pay as much for fed cattle. Don't overlook that very important secondary impact of restricting live-cattle imports.
Marsh: That cost efficiency is very critical to packers — and is especially harmful for smaller packers without the deep pockets of their larger competitors. It also hurts ranchers and cattle feeders who must suddenly truck cattle farther, as well as the ancillary industries that have built businesses around existing packing plants.
BEEF: What's going on with imports from other countries, primarily in the form of lean trimmings? Why can't we produce enough lean beef to meet the demand for ground beef?
Brester: First, it's inappropriate to say the U.S. as a government imports beef. It is companies operating in the U.S. that make the import and export decisions.
The problem is we don't produce enough lean-beef trimmings from our grain-fattened animals to meet U.S. demand for relatively lean ground beef. Hence, the U.S. imports lean trimmings to blend with domestic trimmings to produce the leaner hamburger demanded in retail and food service.
The question really is, what's the most efficient use of our resources? Does it make sense to grind lean cuts like sirloin, tri-tip, chucks, rounds, etc., to satisfy our ground beef demand?
If I'm a cattle producer, I could sell my calves to a grass finisher to grow out and market for grinding. These animals would be leaner and help meet the demand for lean ground beef. Alternatively, I can sell my calves to a feedlot to be grain-finished.
Given the preferences of U.S. consumers, which finisher can pay me more for my calves today? It's the feedlot finisher, not the grass finisher.
Marsh: We're much better off importing lean-beef trimmings from Australia, New Zealand and Uruguay where this type of beef is raised. That allows us to keep our higher value grain-fed beef for domestic consumption. Hopefully we can return in the near future to selling that high-valued beef to other countries that can't produce that type of beef themselves.
BEEF: What about cull cows and bulls for grinding?
Brester: We use our cull cows primarily for grinding, but there aren't enough to meet the demand. Plus, they tend to be sold seasonally, and even most of our cull cattle are still too fat to grind without blending with a leaner product. Furthermore, these supplies are even more limited during the expansion phase of the cattle cycle.
BEEF: What's the outlook for the next year and beyond?
Marsh: While retail demand for table-cut beef and hamburger has weakened this year, it's nothing to worry about at this point. But, we'll need our export markets back as we start building cattle inventories.
Brester: And, let's face it, with current relatively high cattle prices, there isn't a rancher out there who wouldn't want to sell more feeder calves. That takes more cows for breeding. Those rational decisions will eventually increase our domestic supplies.
If we could get Japan and South Korea back, holding everything else constant, the net effect would be to increase fed cattle by $2.50/cwt. and feeder prices by $4/cwt.
Perhaps the most worrisome component for the coming year is higher energy prices' impact on consumer expenditures and the travel industry. Reductions in either will reduce beef demand.
Marsh: While we'll see prices softening going into next year, demand is still solid. There would have to be a shock to the market for there to be any kind of a “bust” in cattle prices.