Overview

The production and marketing of beef calves is perhaps the most common agricultural enterprise in Canadian agriculture. In terms of sheer numbers, there are more producers in Canada with beef cows (over 90,000) and hence calves, than any other farming enterprise. Returns on an individual animal basis are generally modest. Many producers operate their cow-calf enterprise as a part of a diversified livestock and crop farm, or part-time alongside employment off the farm. Nevertheless, a well-planned marketing strategy can increase a producer’s potential profit. Calf producers should take steps to ensure themselves that they have done everything possible to maximize the profit by assessing their marketing options well in advance of when the calves are being sold.

Structure and size of the market

The beef cow-calf sector is a large and well-developed industry and one of the major commodities in Canadian agriculture. Calves are produced in significant numbers in all provinces except Newfoundland-Labrador (see Table 1 below). Generally speaking the majority of beef cow-calf production is located in Western Canada. Similarly, the vast majority of feeder calves (slaughter heifers and steers over 1 year) are in Alberta.

Table 1: Distribution of Cow-Calf Numbers by Province

Statistics Canada 2001 Cat. No. 95FO-301-XIE; July 2006 Cattle Statistics, Cat #23-012-XIE Market Characteristics

Most calves are born in the spring, and are sold from the farm of origin in the fall. Simply put, the market is comprised of many sellers selling calves to relatively few buyers. Beef calves are ultimately destined for the feedlot sector, which is relatively small in terms of the number of actual operations compared to the number of cow-calf producers.

The producer is typically faced with the following selling options:

1. Auction markets;
2. Brokers, dealers, order buyers;
3. Selling direct; or
4. Retain ownership.

Each of these options is described further as follows:

Auction Markets - the vast majority of calves are sold by means of the local auction market. These are located throughout rural areas with regular sales (twice weekly; weekly; bi-weekly during the fall period). Auction markets offer a package of key services such as trucking, presorting by size and/or breed; overnight feeding etc. These services will vary by auction outlet. Some auctions hold special sales, e.g. at peak times in the fall, or for production clubs that offer special quality cattle.

The major advantage to auction selling is the opportunity to expose your cattle to a number of buyers. Further it allows the sellers to take their cattle back if prices are unsatisfactory (although in practice this rarely happens). Prices are set in an open bidding process which is transparent and reported in local news outlets (radio, newspaper, and electronic media).

The major disadvantages to auction selling include disease risk and stress, as large numbers of cattle from diverse sources are crowded into a small area. Of course, this is more of a concern to the buyer than the seller. Despite the care that livestock auctions take to keep stress to a minimum, the auction market is relatively stressful for calves.

Transportation to and from the auction location as well as commissions represent a substantial transaction cost. Transportation to the point of sale is borne by the seller, as are commissions, and check-offs (mandatory per-head fees used to finance industry activity such as producer associations or marketing initiatives). The total of these costs is sufficiently large to discourage a seller from taking cattle back home.

Some of the major livestock auction companies operate satellite sales in addition to their regular live cattle auction markets. In this regard, the seller contacts the auction market to inform it what they have for sale. If the cattle numbers and quality meets the required specifications, the auction market agent takes a video of the cattle offered for sale, and the video is aired on a specialty TV channel, or satellite TV. Any buyer who is registered with the auction company can use TV auction. Bids are made over the phone or the Internet in real time. Sellers can refuse the winning bid.

Other auction companies also offer cattle using the Internet. Agents inspect and describe cattle on the farm, and take still photos. Cattle are later sold either in real time by regular auction, or using a bid-offer system within a specified period of time. In any case, the seller can refuse the winning bids

Auction companies also offer presort sales, where calves from different producers are sorted into uniform lots to improve their value to buyers. This is an excellent way for producers of less than load size lots to receive large lot premiums. In preparation for sale, pre-sorted cattle typically must be backgrounded according to specified protocols.

Brokers, dealers, order buyers – buy direct on behalf of specific customers (such as feedlots, or for export to the U.S.) These buyers seek very specific types of cattle as defined by weight and/or breed. The major advantage is a lower transaction cost. Further commissions and transportation costs are usually borne by the buyer. Compared to auction selling, price discovery is not as open, and tends to favour the buyer who has greater market knowledge. Thus the seller must ensure that he/she is aware of prevailing prices. It is generally recommended that sellers only deal with registered, bonded buyers.

Direct sale by private treaty – a producer always has the option of selling his cattle directly to another cattle producer (backgrounder or feedlot). This type of sale reduces the transaction cost (commissions, etc.). However, the agreed price depends upon the seller’s knowledge of both the prevailing market price as well as the quality of his/her own cattle. Generally speaking, the buyer is likely to have more knowledge of market conditions than the seller. Further payment is not guaranteed.

Retained Ownership – ownership of calves can remain with the original producer, either at their place of origin or at a custom feeder’s lot. For those cow-calf producers who want to reap the rewards and spread their risks beyond calf production, it may be opportunistic to retain ownership throughout the finishing stage. This requires a close relationship with a feedlot operation that has a good reputation with feeding cattle and custom feeders. There are many feedlots that specialize in custom feeding who also provide convenient options for the eventual sale of cattle.

Key Changes or Recent Issues

Bovine Spongiform Encephalopathy (BSE) has been the big story in the cattle business since 2003. As a consequence of this disease outbreak, major beef markets (the U.S.) and minor markets in other countries were closed to Canadian beef. The drop in Canadian cattle prices was catastrophic. Trade in boxed beef and in live cattle under 30 months of age (not for breeding purposes) has resumed and cattle prices have recovered somewhat. Nonetheless the specter of recurrences of BSE or some other disease remains. Food safety and security has become a paramount concern.

A critical part of the food safety and security system is the Canadian Cattle Identification Program, run by the Canadian Cattle Identification Agency (CCIA). This is an industry-initiated trace-back system designed to help contain and ultimately eradicate serious animal disease. It is administered and enforced by the Canadian Food Inspection Agency (CFIA) and Agriculture and Agri-Food Canada (AAFC).

The CCIA program requires producers to identify and tag all calves before they leave the farm of origin, to ensure tags are replaced if lost and that the animal’s identity is not compromised. One such system is Radio Frequency Identification (RFID) tags which can be read by a remote electronic reader. In addition, producers are encouraged to submit age verification data which is the association of animal birth date data with an Animal Identification Number. The CCIA’s national database provides for an Age Verification Process using the Internet. This free of charge, voluntary program enables producers to register birthdate information and have it readily available should it be required by domestic or export markets. Overall cattle export regulations are subject to constant change and are generally tightening. Age Verification may in due course add value to cattle but this remains to be seen.

Another result of the BSE crisis is an increase in the number of establishments within Canada to process slaughter cattle and, accordingly, a significant increase in the amount of beef processed domestically. A recent major change is the significant increase in energy prices, which has put upward pressure on the Canadian dollar with respect to the U.S. dollar.

Price Discovery

The beef business in Canada is an integral part of the Canada-U.S. beef business. Canada produces almost twice as much beef as it consumes, thus export marketing is critical to the industry. Products, live and boxed, move back and forth over the border without duty. As a result, the price of any cattle at any time and place in Canada or the U.S. is established by U.S. prices. In addition, there are futures contracts available on U.S. markets for hedgers and speculators for forward pricing. Futures contract prices provide guidance to price trends. Everything works back from these prices.

If supplies are tight (i.e. good consumer demand for beef), buyers are more aggressive and the price of fed cattle increases, which attracts more cattle from feedlots, which in turn raises prices for feeder cattle and calves. If supplies are heavy, the reverse effect occurs. Buyers then consider feed prices, interest rates, transaction costs, risk factors, and so on, to determine what they will pay for calves at local auction markets.

Local conditions (e.g. weather-related affecting feed supplies, the ability to move cattle) can affect local prices, but the U.S. fat cattle price is always used as a basis.

Significant numbers of cattle are sold directly without any competitive auction process. These cattle are priced using the price as it is established in major U.S. markets.

Key Quality Issues

The key quality factors to consider:

• Health – clearly calves must be healthy and show no signs of disease and/or respiratory problems.
• Good body condition that is neither too fat nor too thin.
• Uniformity with respect to size, condition, breeding etc.
• Backgrounded qualities – de-horned, castrated, vaccinated, accustomed to feed-lot conditions and supported by accurate and complete documentation.
• Lot size - larger lots (multiples of truck load weight, approximately 50,000 lb.) are rewarded with premiums, but uniformity is more important than large lots.

Risk Factors

Beef is an unregulated commodity in North America, which is to say that the price is determined by free-market interaction of supply and demand. Anyone is free to enter the beef business at any time. Also, the market for beef is tied to the overall economy in so many ways that there is scarcely an event that does not affect the price of beef.

If a number of negative or positive factors combine at a certain time, the price of beef can change quickly. Beef prices can therefore be volatile and subject to rapid change.

Major factors affect price including:

• Supply of fed cattle;
• Feed grain prices;
• Trade conditions;
• Political conditions;
• Dollar exchange rates;
• Prices of competing products e.g. pork, chicken, imported beef;
• Overall economic conditions; and
• Consumer trends.

The price of feed is a major factor impacting both the timing of calf sales and the price that feeders will pay for cattle. In turn, the largest determinant of feed prices is the price of corn in major U.S. markets. This is determined by a complex set of interrelated factors, one of which is the number of cattle on feed. Exchange rates, determined mostly by energy prices, also have an effect on the price of beef as well as feed grains and hence the price of calves.

Drought and other weather related conditions in major cattle producing areas in North America also affect the availability and price of feed. Generally, drought has a negative affect on calf prices in the short term. Over the longer term, however since the total calf supply may be reduced, prices will move in an upward direction.

Closing Comments

Finally it very important to have a well developed network of fellow producers, and other sources that have an interest in your success. This network is invaluable in lending inside knowledge and expertise to the development of a successful marketing strategy.

Stay current, learn as much as possible about the marketing environment locally, nationally and internationally. Know where your cattle best fit, and communicate with potential buyers well in advance of your planned selling date These are aspects of marketing that the producer has the most control over.

Carefully consider all the options as you decide when to sell the calves. Remember that there are always a multiple set of risks when selling cattle. Your ability to manage these risks will influence how quickly you choose to sell or hold onto your cattle at any particular time. Markets can be volatile. Also be accurate and realistic in calculating the costs of raising and backgrounding calves. This gives you a better understanding of the potential margins you may be able to earn. There is no substitute for using accurate information, sourcing good advice, and making good judgments.