There’s been a torrent of bad news in the meat sector in the last two months. Tyson Foods reported its first quarterly loss since 2009; HyLife’s processing plant in Windom, Minn., declared bankruptcy; Smithfield Foods is closing 40 sow farms in Missouri; Olymel Foods announced permanent closure of its Vallée-Jonction hog plant in Quebec; and despite rising sales, Maple Leaf Foods reported a loss in the first quarter of 2023.

“Everybody’s feeling the pinch, and these sorts of restructurings are a function of the economic challenges that we have right now,” says Paul Marchand, senior risk management analyst with H@ms Marketing.

WHY IT MATTERS: Uncertainty about input costs, demand and price are making profits more difficult to achieve for many livestock producers.

Marchand singled out HyLife’s Windom plant closure as an example.

“It was purely market conditions that drove that decision,” he says. “It talked about an inflationary environment, a high-cost environment, and just difficult global economic challenges to navigate.

“The plant was losing $6 million a month, according to their bankruptcy filings. This is all a function of the economic conditions that we’re in.”

Marchand says those conditions developed as a result of policy decisions made during the pandemic.

“You can’t disrupt supply chains by asking everybody to restrict their movement. That’s going to create challenges,” he says. “And then you pump a bunch of money into the economy on both sides of the border because you’ve asked people to stay home.”

He doesn’t label that as right or wrong in terms of health policy.

“I’m not going to get into that, but it was economically very disruptive,” he says. “We are feeling the fallout of those decisions that were made in 2020, and we’ll continue to do so until we see a new normal develop.”

Marchand says that new normal won’t be realized until the effects of this inflationary, high interest rate environment are settled, but the timing of that is hard to predict.

“There is a policy lag with any of these decisions so we’re just waiting (for) the impacts of the policy to kind of catch up,” he says. “The good news is, we’ve seen a slowdown in demand and a turnaround in inflation rates. While I don’t think that we see an interest rate rise for the remainder of the year, they almost certainly are not going to cut.”

Current times signal a market correction, he says. The excess money supply caused an inflationary bump and extra dollars in circulation increased demand for higher-cost proteins, which drove up all meat prices.

Then the Bank of Canada and the U.S. Federal Reserve began raising interest rates to bring inflation under control. Companies that were over-leveraged are now feeling the pinch with higher debt-servicing costs. For the same reasons, consumers had to tighten their belts so their taste for high-priced proteins diminished.

“It’s not like you can say, ‘I don’t feel like paying my line of credit today’,” says Marchand. “But I can very easily buy ground pork instead of a loin or ground beef instead of a steak.”

The pork sector is being hit hardest by these market forces. When Maple Leaf reported its first-quarter loss, it blamed “pork market headwinds” in addition to inflationary pressures.

When demand for pork rose in 2021, the industry began producing more pigs. Now that consumers are cutting back, there’s an oversupply.

“As prices go up, sometimes producers start to increase production, perhaps a little too early,” said Stephen Heckbert, executive director of the Canadian Pork Council. “Sometimes we outpace market demand with production. And that’s the cycle we’re in at this moment.”

But Heckbert says the situation is largely self-correcting.

“There’s no perfect world where we can match the market exactly. We’re invariably either too high or too low. When we’re too low, prices go up.”

Heckbert is encouraged by recent developments in overseas markets, where roughly half of Canadian pork goes.

“We’re back in China now. The Philippines is a growing market for us now. As more people enter the middle class, pork consumption is going to grow.”

The price of hogs is determined by the U.S. domestic market, the destination for only 20 per cent of Canadian pork. So, while demand for Canadian pork in overseas markets has a negligible effect on the price producers get for hogs, it does ensure there are markets for Canadian pork when the U.S. market is oversaturated.

The beef sector has been somewhat insulated from economic pressures because producers reduced herd sizes in the face of high feed prices after several years of drought. Demand has never caught up. Now, with consumer spending choked by high interest rates and rising prices, demand will inevitably fall.

“Inflationary pressures have been a challenge for the last couple years from the input side of things in the beef space,” says Manitoba Beef Producers general manager Carson Callum, adding there is still a strong outlook for cattle prices.

“Obviously there are market headwinds that continue to be at play, and producers are monitoring those.”

He recommends that producers take advantage of risk-management programs like livestock price insurance while prices are high and coverage is favourable.

Risk management programs are also an important tool for pork producers, says Manitoba Pork general manager Cam Dahl.

He recommends that producers look into risk management tools where there’s forward contracting or forward pricing, on the feed side as well as the product side.

“That’s not always the perfect solution, but in dealing with that volatility right now, those tools are becoming more and more valuable.”

Dahl says volatility extends to the farm level.

“Whether it’s farrow to finish, if you’re just producing isoweans, or if you’re a nursery or a finisher, everybody’s losing money right now.

“Grain farmers will tell you their prices are falling, but we’re still seeing some of the highest feed prices we’ve seen in history,” says Dahl. “Unfortunately, right now, the price of a hog is falling faster than the price of feed.”

While things remain uncertain, Dahl says he doesn’t expect to see any plant closures in Manitoba.

“I’m confident that there is really a Manitoba advantage to having the processing industry here,” he says. “I don’t see that under threat.”

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“We see (the Canadian dollar) weaker for the first quarter of this year,” said currency strategist Mark Chandler, of RBC Dominion Securities, pointing to “the disparity between the Bank of Canada and the U.S. Federal Reserve.”

The Bank of Canada kept its key overnight rate unchanged at 1.0 per cent on December 6 and remained cautious in the accompanying statement. Meanwhile, the U.S. Federal Reserve is generally expected to be set to raise interest rates by 25 basis points on December 13, said Chandler.

“The first quarter of next year still has some challenges for Canada, even though we’ve had very good job growth and decent output growth,” said Chandler.

Uncertainty over NAFTA renegotiations, together with housing regulations coming into force “is sufficient to keep the Canadian dollar on its back foot,” said Chandler.

RBC expects to see the Canadian dollar trading at around 75 U.S. cents (US$1 = C$1.3300) by the end of the first quarter. The currency was trading at roughly 77.75 U.S. cents (C$1.2862) on December 7.

Chandler added that any relative weakness in the Canadian dollar would be more a function of the U.S. economy doing well, rather than any major issues on Canada’s part.

“Ultimately that’s a good thing,” said Chandler. “If the U.S. grows we grow as well, but the direct effects are more powerful for them.”

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Canola ended the week with new contract highs in many months, and the bullish technical signals could be setting the stage for further gains. For the most active November contract, the clear break above $645 per tonne will leave that former resistance level as new support. As far as the upside is concerned, the weekly charts don’t show any real targets until the $680- to $690-per-tonne area.

While harvest pressure does have the potential to slow any advances in the near term, the fact that production is unlikely to live up to earlier expectations should keep end-users as good buyers if they want to secure supplies going forward. Heavy winds and hail during the week damaged canola lying in swaths across the Prairies, although the extent of the damage to the crop as a whole remains to be seen. As long as there is still canola in the fields, expect weather issues to remain a factor in the futures going forward — especially as temperatures turn cooler and the risk of frost rises.

In the grain markets in Winnipeg there wasn’t really very much trade during the week, but the bids and offers that came forward were enough to take milling wheat higher and barley lower. Durum remained unchanged.

In the U.S., wheat and soybeans were up, while corn was down. The big event of the week for the grains and oilseeds in Chicago was the release of the U.S. Department of Agriculture’s monthly supply/demand report on Wednesday. The headline numbers were deemed bearish for corn and bullish for soybeans, and the two commodities reacted accordingly. While both crops saw their yield forecasts revised lower from the previous month, the cuts to corn production did not live up to market expectations, while soybean supplies were pegged below trade guesses. USDA now forecasts U.S. corn yields at 122.8 bushels per acre, down from 123.4 bushels per acre in August and the year-ago level of 147.2 bushels per acre. Soybean yields are forecast at 35.3 bushels per acre, which compares with the August forecast of 36.1 and the year-ago level of 41.5 bushels per acre.

Wheat futures in the U.S. posted the largest gains during the week, although the strength there was less a function of the USDA report and more tied to problems with wheat crops in other parts of the world. Reports out of Australia, Europe and the Black Sea region during the week were all pointing to smaller wheat crops in those key growing regions. Smaller crops elsewhere will mean more demand for U.S. supplies, which supported prices.

Aside from the standard supply/demand storylines, the key factor to watch in the grain markets these days is the global economy. The U.S. Federal Reserve announced new stimulus measures during the week as the central bank continues to try to prop up the U.S. economy. U.S. interest rates have already been effectively at zero for some time, leaving the Fed with fewer options to stir the pot. What the Fed did was announce an open-ended quantitative easing program, sometimes called QE3. This amounts to the government promising to buy US$40 billion worth of mortgage-backed securities per month for an indefinite period, to put some more money into the economy. Many analysts see the QE3 as effectively printing money, which devalues the U.S. currency.

A softer U.S. currency makes U.S.-priced commodities more attractive to international buyers, and the theory behind quantitative easing would see that increased demand offset the resulting weakness in the currency. How that plays out remains to be seen.

Meanwhile, a weaker U.S. dollar usually means a stronger Canadian currency — and the loonie was trading at very strong levels during the week. The stronger Canadian currency makes Canadian products less attractive in the international marketplace.

Another global factor circulating on the sidelines of the agricultural markets these days is the renewed uncertainty in North Africa and the Middle East. The unrest has the potential to sway the financial and crude oil markets, making the international news just as important as the local weather reports when it comes to marketing decisions.

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“The Bank of Canada continues to display a tightening bias, so that is prompting people to expect that the bank will be one of the first of the central banks to tie in rates,” said Shaun Osborne, chief FX strategist with TD Securities.

Osborne added that in the current macroeconomic environment, the Bank of Canada raising its key interest rate would be “a bit of a stretch.” Nonetheless, spreads for Canadian stocks have widened compared to U.S. stocks, making the loonie more desirable for investors, he added.

Stable commodity prices have also provided underlying support for the Canadian dollar, Osborne said. He added that Canadian crude oil has been sitting close to the C$100-per-barrel mark, which has continued to support the upside in the Canadian dollar.

However, even though commodity prices are sitting high, lower export figures for the country have weighed on the Canadian dollar’s value. He said that in a weak global growth environment, Canada has struggled to make profitable trade with other countries.

“There’s a negative in terms of trade effect that is quite apparent for the Canadian economy from a longer-term point of view. It suggests to me that the Canadian currency is somewhat overvalued at these levels,” Osborne said.

The key factor to turning exports around would be increased demand for Canadian goods and services in the U.S. But growth in Europe and Asia has slowed as well, so increasing exports will likely be a long-term issue for the value of the Canadian dollar, Osborne said.

Going into 2013, Osborne expects a relatively low-volatility market for the Canadian dollar. He added that values for the loonie shouldn’t drop lower than US$0.95, but could push as high as US$1.05.

If the Bank of Canada does raise its key interest rate as expected in 2013, the Canadian dollar could see further strength. But the U.S. Federal Reserve has shown an easing bias that would leave the Bank of Canada hard pressed to raise its key interest rate, as Canada’s central bank is so tightly linked to the U.S. central bank, Osborne said.

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Canola futures on the ICE Futures Canada trading platform suffered a serious price setback during the week ended Sept. 23. Global macroeconomic concerns combined with an aggressive harvest pace on the Canadian Prairies to send values down sharply. All the canola contracts lost at least $20 per tonne each.

The penetrat ion of support in the November canola future at $540 added to the bearish price scenario. The sharp sell-off in CBOT (Chicago Board of Trade) soybean futures also contributed to the downward price slide seen in canola. Western Canadian farmers also continued to be steady sellers of their newly harvested canola into the country elevator system, which served to amplify the price weakness.

Underlying support came from confirmation of a Canadian canola sale to the United Arab Emirates (UAE) during the week for an

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Canada,visit ICEFutures Canadaupdates at www.manitobacooperator.ca.

unspecified delivery date. Steady domestic crusher demand and the pricing of old export business to Japan also helped to slow the price declines. The downswing in the value of the Canadian dollar helped to slow the decline.

Western barley futures on the ICE platform remained in dormancy during the week, with commercials finished realigning their October positions for the time being.

Feed barley cash bids, meanwhile, continued to experience some firmness, with increased demand and tighter supplies providing some of the strength.

CBOT soybean futures continued their downward price trek during the week ended Sept. 23, with the unwillingness of global investors to hold on to risky assets, such as commodities, accounting for a good portion of the price drop. The activation of sell-stop orders on the way down exaggerated the price weakness.

The continued upswing in the value of the U.S. dollar also did soybeans few favours, by making the commodity more expensive to purchase. Sentiment that CBOT soybean futures were oversold and in need of an upward correction, helped to temper some of the price declines.

CBOT corn futures also posted some significant losses during the week. Here too, global economic jitters fuelled the downward price slide. Technical support levels were penetrated on the way down, which in turn amplified the price declines.

Wheat futures at the CBOT, Kansas City and Minneapolis exchanges also experienced some price weakness, as these markets also could not escape the sell-off of commodities by speculators and commodity funds due to the uncertain global economic outlook.

Some underlying support was derived from concerns about the quality and yield of the spring wheat crop being produced in the northern-tier U.S. states and the absence of precipitation for the seeding of the U.S. winter wheat crop in more southerly states.

Losses in soft red wheat futures at the CBOT were restricted by ideas that most of the bearish price influences have now been absorbed and that values were in need of an upward correction.

MEDITERRANEAN TURBULENCE

It appears the impact on the grain and oilseed markets from outside macroeconomic forces is not going to go away anytime soon and will continue to provide for some turbulent price movements.

This past week s economic concerns were initiated by the potential of Greece defaulting on its debt. Those fears were achieved by the resentment the country displayed over the austerity measures demanded by the International Monetary Fund and European Central Bank.

Financial analysts feel the default by Greece will only unsettle the European banking system and lead to a credit freeze, disrupting world trade.

Comments by the U.S. Federal Reserve during the reporting period that the U.S. economic outlook is still bleak and that the euro-zone economy is on the brink of a recession also did not serve the commodity markets in a positive way.

With the global financial markets more than unsettled, the potential of further declines being suffered by the oilseed and grain sectors in Canada and the U.S. in the immediate future appears to be strong.

However, the one saving grace is that the world still needs to eat and with that concept comes good demand. At some point when prices, whether in canola, wheat or soybeans, drop to a low enough level, end-users will step in.

Countries such as China continue to look for pricing opportunities and other such end-users may step up to the plate and help turn this bearish market attitude back to the upside.

Dwayne Klassen and Phil Franz-Warkentin write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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DWAYNE KLASSENCNSC

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“Our forecast is for the Canadian dollar to hit US$1.05 in Q2, and we’re probably getting there a little faster than anticipated,” said David Watt, senior currency strategist with RBC Capital Markets. The Canadian dollar was sitting above US$1.04 on April 6, a level not seen since 2007, and near the historical highs of the past 40 years.

Watt said recent strength in the currency was tied to the fact that the global economy does not seem to have been hurt by high oil prices and the situation in Japan as much as some had feared. He said risk appetite was returning to the markets, allowing the Canadian dollar to outperform its U.S. counterpart.

While he said the weak U.S. dollar will eventually rebound, that is not expected any time soon, with the divergences between the U.S. monetary policy and the rest of the world expected to continue into 2012.

Watt said that unless there was either a “distinct change” in the Canadian economic backdrop for the worse, or in the U.S. for the better, “we could spend some time above that US$1.05 level between now and the end of Q2.”

He added that RBC is forecasting that the Bank of Canada will raise interest rates by 100 basis points in the second half of this year, while the U.S. Federal Reserve won’t raise rates until the second quarter of 2012.

“It doesn’t necessarily mean that the Canadian dollar will continue to hit home runs, but it does suggest that we’re likely to see more strength than we’ll see any persistent weakness against the U.S. dollar,” he said.

Canada’s current election campaign, the fourth in seven years, is unlikely to alter the fundamentals for the currency regardless of the outcome, said Watt. He said other factors, including interest rates, commodity prices, and the global economic backdrop will move the currency first, with the election “just adding noise.”

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Some analysts have blamed the fed’s quantitative easing for flooding the global economy with money and helping to drive prices for food and other commodities higher.

“It’s entirely unfair to attribute excess demand pressures in emerging markets to U.S. monetary policy because emerging markets have all the tools they need to address excess demand in those countries,” Bernanke told an audience at the National Press Club in Washington.

Policy-makers in a number of emerging markets have also argued the fed’s easy monetary policy has undercut the U.S. dollar and sparked a potentially inflationary flood of private capital into their markets.

Bernanke repeated that the U.S. central bank’s monetary policy is aimed at stimulating domestic growth, adding that no one could argue the U.S. economy was overheating.

The UN Food and Agriculture Organization Food Price Index on Thursday touched its highest level since records began in 1990 as rising food prices showed no sign of relenting, prompting concerns of social unrest.

“Some of the emerging markets are facing inflationary pressures because their own economies are growing perhaps even faster than their capacity,” Bernanke said.

He said higher food prices were stoked by increasing consumer demand in emerging economies for goods such as meat.

“As people’s diets are becoming more sophisticated and as they eat more beef and less grains and so on, the demand for food and energy rise, and that’s the primary long-term factor affecting the real price of commodity and food,” Bernanke said.

Still, some economists were skeptical.

“We do not find credible Bernanke’s assertion that the rise in equity prices, narrowing in corporate bond spreads, and rise in inflation compensation in the Treasury market are a result of (fed policy), but the rise in commodity prices is unrelated,” said John Ryding and Conrad DeQuadros, of RDQ Economics, in a research note.

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Growers are not selling all that much anymore, because of their general bullishness. While that restrained hedge pressure doesn’t hurt the upward trend in canola, the reluctant farmer sales are not necessarily behind the gains either.

In my own non-scientific poll of one producer, he said he was basically locking up the bins for the time being and would wait to make any further canola sales until the market starts to show some topping action.

I spoke with a broker this week who commented that “if you polled 100 growers, they would tell you the reason canola is up is because of the poor crops in Western Canada and the fact that there’s not a lot of canola around.” Farmers were waiting for much higher prices, he said, but will still be making some scale-up sales as opportunities present themselves. However, the broker added that those fundamental issues don’t really matter all that much right now, and the real reason canola keeps climbing is fund buying and the fact that canola needs to keep pace with other oilseed markets.

Western barley futures were steady to higher, although only a few contracts actually traded.

In the U.S., soybeans, wheat and corn were all higher, with the soy complex taking the lead during the week. Some of the activity in the U.S. markets was stemming from a decline in the U.S. dollar index and a move by investors into commodities as a hedge against inflation.

STARTING THE PRESSES

The U.S. Federal Reserve announced it would begin “quantitative easing,” which is basically a complicated way of saying they will start printing more money. The increased monetary supply effectively devalues the currency, but is intended to boost the economy by making funds more readily available.

A weaker U.S. currency makes commodities priced in U.S. dollars less expensive to foreign buyers.

The activity in the U.S. dollar did help the Canadian currency return to near parity during the week, but the strong loonie didn’t really slow the upward climb in canola. While the currency was at par with the U.S. dollar, it was actually lagging many of its other international counterparts.

Looking past some of the fund-and chart-related strength in canola, the seemingly unquenchable demand for oilseeds from China is another factor to keep an eye on. While issues with blackleg fungus remain unresolved with China, as far as canola is concerned, exporters are still selling as much as they can into the country and China remains the second-largest destination for Canadian canola exports behind Japan.

U.S. soybeans are currently moving to China at a record pace, leading to some concerns about tightening stocks. U.S. corn stocks could also see some tightening, although the demand side of the coin for corn is starting to soften as high prices cause some end-users to ration demand.

Corn could be a key driver in the grain and oilseed markets moving forward, especially as soybeans and corn are already locked in their annual battle for acres next spring. Corn futures are already trading above US$6 per bushel in many months and finished the week only slightly below that key level in the nearby December contract. A few years ago corn prices that high would have led to an exodus from the ethanol sector, where corn is a major feedstock. However, that doesn’t seem to be the case so far; the sector seems to be still making money even with these high input costs.

Wheat was up in sympathy with most everything else during the week, seeing some added support from concerns about dryness hurting U.S. winter wheat crops. While there is some more moisture returning to the forecasts, that precipitation may not be enough to actually alleviate those concerns.

– Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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