Overview

Feeding beef cattle to market weight is a significant sector of Canadian agriculture. In Canada, most cattle are fed on large scale feedlots (10,000–50,000 head capacity) in Southern Alberta. Significant numbers of cattle are also on smaller lots in Southwestern Ontario as well as western Canada. There are cattle feeding operations of every other scale, including small cow-calf operators who regularly feed a few animals to market weight for their own use and for sale to neighbours. It is often said that the success of a feedlot operation is the result of two factors: (1) the buy – namely the prices at which cattle are purchased; and (2) the sell – the prices at which cattle are sold. Marketing is an extremely important determinant of success.

Structure and size of the market

Feeding beef cattle is a large and well-developed industry and one of the major activities of Canadian agriculture. Market-weight cattle are produced in all provinces, most significantly in Southern Alberta. Southwestern Ontario is also a location for feeding cattle. Canada's production (beef plus live slaughter cattle exports) is estimated at 1.68 million tonnes for 2005. Canada processed about 4.4 million head in 2005. About 30% of Canadian production is exported, with almost all of the exports going to the U.S. and Mexico. Exports to Asia and Mexico are expected to grow as Canadian beef processing capacity expands.

Table 1- Distribution of Slaughter Cattle Numbers by Province

Statistics Canada July 2006, Cattle Statistics, Cat #23-012-XIE Vol5#2

Markets’ Characteristics

Most calves are born in the spring, and are purchased by feedlots in the fall. Some are fed to market weight on their farm of origin; some are fed to an intermediate weight on their farm of origin (backgrounded); some are backgrounded at one feedlot and subsequently fed to market weight at another feedlot.

A feedlot may specialize in custom feeding, i.e. ownership of cattle remains with the original producer and are placed at a feeder’s lot. Cattle feeders sell their specialized knowledge in managing large numbers of cattle, obtaining feed at advantageous prices, and marketing finished cattle, without ever taking ownership of the cattle.

Producers typically have the following options:

• Live auctions;
• Direct sale to packers on a live weight basis;
• Direct sale to packers on a dressed weight basis (payment on a weight and grade grid); or
• Direct to consumer.

Packers may be federally inspected i.e. large companies having national and international sales, (may be located in the U.S.); or provincially inspected which are smaller companies or co-ops serving a special local market. Local markets may be distinguished by having slaughtering protocols i.e. halal or kosher; breed i.e. angus beef; brand distinguished by feeding protocols such as corn fed, grass fed or organic; or may simply be a geographically determined market. Federally inspected packers may also participate in special programs.

Live Auctions - cattle may be sold by the local auction market although this channel is much more common for the sale of feeder cattle entering the feedlot than for the sale of market-weight cattle. Auction markets are located throughout rural areas with regular sales. Auction companies usually hold one or two sales per week. Prices are set in an open, publicly transparent setting, and prices are widely reported in local news outlets (radio, newspaper, and electronic media). Auction markets offer a package of key services such as trucking, presorting by sex, size and/or breed; overnight housing. These services will vary by auction outlet. Some auctions hold special sales, e.g. for production clubs that offer special quality cattle.

The major advantage to selling cattle at live auction is the exposure of cattle to the maximum number of buyers. Further it allows the sellers to take their cattle back if prices are unsatisfactory (although in practice this rarely happens).

Disadvantages include stress to cattle as large numbers from diverse sources are handled in small areas. Despite the care that livestock auction companies take, there is additional risk of bruising and “dark cutters” each time cattle are handled. 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 (nominal mandatory per-head fees used to finance industry activity). These costs are sufficiently high to discourage a seller from taking cattle back home.

Direct sale to packer - direct sales to packers are the most common method of selling. Buyers working on behalf of the major packers continually source cattle to ensure that they have sufficient supplies on a daily basis to keep their processing plants operating at capacity. These sales are contractual in nature, i.e. the cattle feeder arranges to deliver certain number of cattle on a set date and may do so regularly over a period of time depending upon the size of the feedlot. Most sales are settled on the basis of dressed weight and grade using the packers’ price grid. Prices are generally predetermined using U.S. fed cattle prices as a base. Some sales are based on live weight, but these are usually small packing plants. Of course in the case of specialty cattle, contractual arrangements vary.

The major advantage to selling direct is the lower transaction cost due to the absence of third party commissions. 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 typically has greater market knowledge. Thus the seller must ensure that he/she is aware of prevailing prices, particularly when local market conditions are strong compared to U.S. prices. As well, weighing conditions are critical.

Feedlot managers have the choice of selling cattle to Canadian or U.S. packers. This decision depends upon price offerings. Each week thousands of live market-weight cattle are loaded, shipped and destined for U.S. packers. Cattle being shipped to the U.S. must be inspected by a certified veterinarian upon loading. Each shipment must be accompanied by detailed documentation ensuring origin, health status, numbers and destination.

Direct to consumer – some producers may develop a direct-to-consumer market. Cattle are delivered to a provincially inspected plant where they are custom killed and processed. Most often carcasses are prepared by a small local business, and frozen before delivery.

Key Changes or Recent Issues

Bovine Spongiform Encephalopathy (BSE) has been the big story in the cattle business since 2003. 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 the 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, and 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 associates animal birth date data with an Animal Identification Number. The CCIA 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 more 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. Products, live and boxed, move back and forth over the border without duty. Consequently, the price of any cattle at any time and place in Canada is established by U.S. prices. Prices are quoted on the Chicago Mercantile Exchange (CME). There is no open price discovery system per se. Prices are usually set by a formula using U.S.- fed cattle prices as a base.

In addition, there are futures contracts available on U.S. markets for hedgers and speculators. Futures contract prices provide guidance to price trends. All other pricing works back from these prices. The difference between the specified futures price (the current cash price quoted in Chicago) and the price being offered in a local market is known as the basis. In a perfect market, the basis should be the cost of transporting/transacting cattle from the local market to the Chicago market. However, this difference will vary due to many other factors including local supplies; local demand; the packers killing schedules; etc. Knowledge of the basis and managing what is known as the ‘basis risk’ is critical in obtaining the best prices for market-weight cattle.

Many factors affect the price discovery process. If supplies are tight, i.e. beef products are moving off store shelves, buyers are more aggressive and the price of fed cattle increases. This attracts increased numbers of 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 etc. 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 to packers without any competitive auction process. These cattle are priced relative to prices set in the U.S. market.

Key Quality Issues

Quality in this context is generally defined as:

• Good health.
• Good condition, neither too fat nor too thin.
• Weight close to market demand.
• Clean. Dirty cattle are indicative of poor stockmanship and possibly other quality problems. Clean cattle are easier to process and decrease the likelihood of carcass contamination. If cattle are sold on a live weight basis, buyers discount for mud and manure.
• Calm. Quiet cattle are less likely to be dark cutters, easier to process, likely to have better meat quality, and indicate good stockmanship.
• De-horned. Horned cattle, including those with tips, increase the probability that cattle in the group will show evidence of bruising.
• Properly castrated, preferably knife cut. Improper castration not only means the particular animal is likely to be a dark cutter, but also means the cattle in that group may have been more stressed hence lower quality.
• Accurate and complete records of processing activity, particularly that any drugs or implants were administered according to label, and withdrawal times observed
• Paperwork accurate and complete.

Ultimately quality is measured by the grading system. In Canada there are three key levels: AAA, AA and A; in the U.S. the system is USDA Prime; Choice, Select and No Roll. The higher the grade, the higher the price received.

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 are therefore volatile.

The major factors impacting prices include:

• Supply of fed cattle;
• Feed grain prices;
• Trade conditions and/or restrictions;
• 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 sale (weight of cattle) 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 numbers 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 of North America also affect the availability and price of feed. Generally, drought has a negative effect 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

The market for beef in Canada is driven largely by what happens in the U.S... In effect it is a North American market and impacted by a host of inter-related factors. Generally speaking, the market for finished cattle has few buyers (a handful of large packers) and many sellers led by a very sophisticated feedlot sector. Market knowledge is critical to success.

It is 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 about the marketing options, when, where and to whom. These are aspects of marketing that the producer has complete control over.

Consider all the options while you’re deciding when to sell the cattle. Markets are volatile. Be accurate and realistic in calculating costs. Be accurate and realistic in estimating the performance of cattle, especially if they are to be kept longer than is anticipated in an attempt to sell in a stronger market. Know where your cattle fit, and communicate with potential buyers well in advance of your selling date.