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Hog and cattle producers are facing a year of mixed profitability

Uncertainty may be the main certainty of 2019 as feed costs and consumer demand are unknowns

Hog and cattle producers face a year of uncertainty about feed and other operating costs as well as how strong the domestic and international demand for meat might be, says Farm Credit Canada.

In an outlook, FCC said the top economic trends facing the producers will be the extent of China’s meat demand, muted feed cost increases, stronger overall export demand and a weaker loonie and higher interest rates.

Profitability will be mixed but positive for both sectors with increased export demand, it said. Hog prices will be pressured by a large North American supply of pork but offset by demand from China where African swine fever (ASF) has spread in its herds.

While the USDA predicted a 5.3 per cent increase in hog production this year with a corresponding drop in animal prices, that number will likely be revised downward, FCC said.

Meanwhile, domestic demand for beef should repeat its strong 2018 performance this year while exports could reach record figures.

“Prices are expected to average $145 per cwt in 2019, despite U.S. production expanding by more than 3.0 per cent in response to continued growing demand,” the outlook read.

Still Canadian production isn’t expected to increase as there aren’t enough cattle to grow the national herd because packers are taking all the animals they can get, FCC said. “Cattle on feed in Canada as of November 2018 were estimated to be 10 per cent higher than the five-year average.”

Herd expansion has also been challenged by dry conditions on the Prairies that pushed up feed costs in 2018, which “meant fewer retained heifers and increased sales to feedlots at smaller weights. Feedlots, with fewer Canadian cattle available, imported more live cattle from the U.S. in 2018, a trend that’s expected to continue in 2019.”

For farmers, FCC said 2019 “will be a good year to seek efficiency gains by working to reduce operating costs relative to revenues.”

“Proper evaluation of financial risks will be especially important on loans due for renewal in 2019, as periods of rising interest rates may require greater shares of revenues to cover interest payments. Watch your debt repayment capacity, given the slowdown in income – especially for operations with recent, significant investments.”

If the U.S.-China trade tensions continue, American farmers could gain lower feed prices for cattle and hogs as corn production is increased and soy cut back.

Prices could also rise if the impact of ASF on Chinese hog production is greater than expected and China needs to import more pork, FCC said.

“It’s too early to tell if China will have trouble containing the disease in a production system still relying on small individual producers.”

Western Canadian feed prices could climb in 2019 because of additional stocks generated by Western Canada’s late grain harvest in 2018, FCC said. An east-west spread in feed prices “will be more likely if Eastern Canada must import corn to replace its crop infected with deoxynivalenol (DON). That will become clear with subsequent estimates of crop quality, although expected yields may be enough to meet domestic needs. Western beef feedlots may also prefer to import corn with continued tight barley supplies.”

Lower hog prices and steady gains in global pork demand are expected to drive U.S. exports nearly eight per cent higher in 2019, following six per cent growth in 2018, despite reduced exports to China.

A strengthening U.S. dollar will help make Canadian meat exports more competitive, FCC said. Exports should also benefit from the Comprehensive and Progressive Trans-Pacific Partnership agreement that “helps displace U.S. exports as Canadian beef exports face lower tariffs. Japan typically imports about 30 per cent of its beef from the U.S.”

“The reduced tariffs on pork should boost Canadian exports to CPTPP members which imported C$1.39 billion worth of pork products in 2017.”

The new NAFTA agreement provides “the same access granted for animal and meat exports. Mechanisms to resolve trade disputes were also preserved; these have been helpful for livestock sectors in the past. New grading schemes introduced in the deal will further harmonize the North American cattle supply chain.”

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