Industry veteran Charlie Gracey saw it coming. Gracey traces the current beef industry slump back to the 1970s which, in his view, set the stage for the post-BSE downturn.
“During the four-year period from 1974 to early 1978, the industry tanked due to exuberant oversupply and huge amounts of equity were lost, particularly in the cow-calf sector and most particularly among younger producers just entering the industry,” Gracey says.
“The industry was far less export-dependent at that time, exporting 15 per cent of its production. So the solution was found mainly in the domestic market by simply eating its way through the surplus.”
When stability returned, Canada embarked on an aggressive beef expansion program focused on the U. S. market.
Beef and cattle exports leaped from 15 per cent of domestic production to 58 per cent. More than 90 per cent of total exports went to the U. S., either as beef or live cattle, while domestic usage actually declined. With herd sizes expanding in response to growing exports, producers saw a significant increase in equity from 1986 to 2002.
Gracey says he saw trouble looming as early as 1996 when the U. S. became increasingly protectionist toward foreign beef and cattle. If the U. S. market ever closed for any reason, collapse would be inevitable.
That’s exactly what happened after the U. S. borders closed May 2003. This time, unlike the 1970s, there was no way Canada could eat its way through a mountain of beef. Domestic cattle sales dried up, prices dropped and producers’ equity plummeted.
Today, the industry is being forced to adjust with its most rapid herd liquidation since 1974-77. It’s a direct result of expanding herds to meet a market on the false assumption that it would always be there, says Gracey.
The thing to do now is to learn from past mistakes, he said.
“The industry needs a lot more straightforward market analysis to avoid the error of the past, which was the blind and naive belief that we could expand continuously and there would be an eager market for our production.
“It’s time for a little more demand pull and a lot less supply push.”
Brenda Schoepp agrees. An Alberta-based market
strategist, Schoepp suggests packers may have reacted too quickly in expanding slaughter capacity soon after BSE cut off exports.
It seemed to make sense at the time: build new beef slaughter plants, expand existing ones and take charge of your own destiny.
But it reflected a build-it-and- they-will-come attitude which was out of step with the new reality, Schoepp says.
“Once again, we were looking at a supply push instead of a demand pull.”
True, an expanded capacity enabled packers to slaughter animals backed up on farms for a lack of markets. But a lot of packing projects foundered because of inadequate operating capital (Ranchers Choice in Manitoba was a prime example). Today, a continuing herd liquidation means packers are not fully utilizing their shackle space.
Where are the missing cattle? Some are headed south.
Schoepp notes Canada continues to export live cattle to the U. S., notwithstanding its country-of-origin restrictions. The result is a widening basis (the difference between U. S. and Canadian cash prices as expressed in Canadian dollars).
That shouldn’t be the case with the value of the loonie near par with the greenback. But it points to an anomaly: packers with the capacity to handle the domestic kill still underbid U. S. packers for Canadian cattle and end up with empty shackles.
“If the dollar is at par, my question is, why aren’t we taking control of our industry?” Schoepp asks.
Packers say the newly required removal of specified risk materials (SRMs) from beef carcasses as a BSE control measure saddles them with extra costs. This makes them uncompetitive with their counterparts in the U. S., where SRM removal rules are less strict.
Small provincially inspected abattoirs say they are particularly unable to shoulder the extra expense of removing SRMs, given their narrow financial margins.
The Canadian Food Inspection Agency insists removing SRMs, in accordance with OIE guidelines, is central to regaining export markets and restoring consumer confidence in food safety.
But Kevin Grier, a livestock analyst with the George Morris Centre, thinks the CFIA may have been overly zealous requiring SRM removal.
“The CFIA in its wisdom felt that we were going to gain access to other markets by going above and beyond what is the case in the United States. And that hasn’t occurred,” said Grier.
“So in other words, we’ve imposed a cost on ourselves for no benefit that I can see.” [email protected]