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Facing a new reality

by Leo Quigley
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Prior to May 20, 2003, Canada’s red-meat industry was on a roll. Feedlots were full, producers were calling for additional packing capacity and overseas markets were blossoming. In spite of the 9/11 attacks and tighter border restrictions, beef, pork and live animals moved freely between Canada and the US in what was generally believed to be a North American market pinned to the US dollar.

This was a decade after producers on both sides of the border had watched their television screens in horror as massive piles of cattle in Britain were put to the torch to eradicate bovine spongiform encephalopathy. At that point 1,000 BSE cases per week were being identified in the UK.

Little did they know that what they were watching was a prelude to what would play a big role in the next chapters of Canada’s red-meat industry.

The discovery of a BSE-infected cow in Northern Alberta and the immediate closure of the US border threw Canada’s beef industry into a tailspin from the farm gate to the supermarket – to the point where cattlemen were selling beef off their tailgates at $1 per lb.

However, that was to be only the beginning.

That border closure was followed by disruptions brought about by H1N1 in the hog industry, country-of-origin labeling that choked market access for both sectors, a plunging US dollar that stripped away a major competitive advantage for Canadian producers and skyrocketing feed prices.

The result for the red-meat industry: Canada’s beef herd and sow herd are now at record-low levels and packing plants are having difficulty finding enough supply to operate efficiently.

Consolidating beef industry

Brian Perillat, senior analyst with CanFax, says, “In six short years, we’ve wiped out nearly 20 percent [of Canadian cattle] from the 2005 peak. We had nearly 16 million head of cattle in 2005 and this year we’re down to just about 12.5 million. There are fewer players and they’re getting bigger at all stages. And when the margin players, such as the packers and feedlots, start controlling their input costs, it all gets passed down to the cow-calf producer in terms of the price they receive.

“Many have really been unprofitable and left the industry,” he adds. “But, some have consolidated and clamped down on costs of production. We’ve got a more efficient industry now than we did prior to BSE.”

But, it’s cow-calf producers that ultimately drive the total supply of cattle in Canada over the long term and with the present situation, it would take a long time to build the herd back to pre-BSE levels.

So far this year, Canada has imported more US beef into Eastern Canada than usual, Perillat says. “There are very tight supplies in Eastern Canada so we’re importing more beef into Eastern Canada than last year,” he adds.

When it comes to export partners besides the US, he says it’s taking longer than expected to build, or rebuild, markets since the BSE scare, but they’re slowly returning and, are “absolutely critical to the overall success of the industry.”

Travis Toews, president of the Canadian Cattlemen’s Association, says the fact that Canadian cattle supplies are tightening is the most significant trend in the industry and the number of people in the industry is also shrinking. He says the value of the Canadian dollar vis-�-vis the US dollar is a major issue that most economists say will be part of the beef business for awhile.

“We’re going to have to live with that reality,” he says. “One thing is clear, we can no longer hide behind the cheap currency to mask any regulatory or production inefficiencies that we have in this country.”

The higher Canadian dollar is making US exports more competitive globally, Toews says. And because the US is such a large consumer and producer of beef products, it’s a major player in setting prices.

Toews believes Canadian producers are emerging as a more competitive industry. Operations have become a little larger through this period and that usually results in some efficiencies through economies of scale.

He adds that over time, the industry’s cost structure will adjust to the higher dollar and costs will be reduced as well.

Asked if initiatives to diversify Canada’s marketplace by increasing exports to countries other than the US are having an effect, Toews points out that for the first quarter of 2011, exports to the US and Mexico were down by 27 percent while exports to the rest of the world were up six percent.

“I’m quite optimistic about the next five years,” he says.

Hog depopulation

Both sectors of the red-meat industry have suffered from the lower US dollar, high feed prices, COOL and animal health issues. However, the hog industry’s depopulation has also been assisted by major efforts in Ottawa to empty barns.

Called the Hog Farm Transition Program, the federal government offered producers C$75 million (US$80 million) to exit the industry for at least three years. And according to the Canadian Pork Council, the agency that administered the program, it has resulted in a 10 percent reduction in the national breeding herd.

In addition, in the spring of 2008, with the industry teetering on the brink of collapse, the federal government offered producers $46 million (US$47.5 million) to kill off 150,000 breeding sows with a target of reducing the population by 3 million animals.

As might be expected, these programs, together with the sinking US dollar and the advent of COOL, were responsible for the dramatic slippages in both the beef and hog herds north of the border, to the point where packers have found themselves experiencing a shortage of supplies.

As a result, a number of plants have closed including:

• The XL Foods Inc. beef plant in Calgary, Alberta, which closed its doors in April, 2011 citing the decrease in the Western Canadian cow herd and challenging competitive conditions in the marketplace. The XL Foods Inc. beef plant in Moose Jaw, Saskatchewan, previously closed its doors in August 2010 following labor difficulties. XL Foods continues to own a large plant in Brooks, Alberta, which it purchased in the spring of 2008 from Tyson Foods.

• As part of a major re-organization, Maple Leaf Foods Inc. has said it will close its processed meat facility in Surrey, British Columbia, with plans to consolidate its manufacturing to fewer, dedicated plants in an effort to reduce supply chain costs and improve efficiencies. It also shut down its pork plant in Berwick, Nova Scotia in April and, late last year sold its pork slaughtering facility in Burlington, Ontario to Fearman’s Pork, an affiliate of Sun Capital Partners. The company’s Burlington plant was the third-largest in Canada. Only the Maple Leaf plant in Brandon, Manitoba and the Olymel plant in Red Deer, Alberta, are larger.

• New plant openings have been few and far between. However, a plant that had been previously closed by Worldwide Pork in Moose Jaw, Saskatchewan was renovated by the Donald’s Fine Foods and reopened as Thunder Creek Pork earlier this year. The plant, which received government financial assistance for the refurbishing, is expected to process roughly 300,000 hogs annually.

One man’s vision

The future for Canada’s red-meat industry is uncertain. The downsizing that has taken place may stabilize the industry in the short term, but there are other factors, such as the increasingly competitive US dollar and a packing industry south of the border, that has grown into a world-class powerhouse that appear to be here to stay.

While some in the Canadian industry seem prepared to accept the new reality, there is at least one person who believes that if Canada hopes to remain competitive, it needs to change. He’s Jerry Bouma, strategic planning consultant with 25 years experience in the ag industry including management consultant with Deloitte Touche and marketing manager with Maple Leaf Foods. And he believes the changes should be dramatic.

Without change, Canada’s red meat industry is in danger of becoming “A domestic industry and a questionably competitive domestic industry,” he says.

Government programs to reduce livestock numbers, he says, are: “A traditional, old-style, economic response. The real question should be ‘Can Canada compete in a more significant way in world markets? Do our major players- Maple Leaf and Olymel -have a demand for product that exceeds what they’re currently able to supply?’ And, the answer, quite frankly is ‘yes.’”

He believes the industry needs to move to a “competitive systems” approach.

“We have to figure out a way to move toward an integrated system where there’s a shared interest in the final bottom line between producers and processors rather than the transactional arrangement that we have now,” he says.

Canada’s beef industry, Bouma adds, is basically a raw materials supplier to the US.

“That means all the pricing is reflective of US pricing,” he says.

“BSE sent a huge shock through the system and ever since then it has been trying to recover. However, there’s a cloud hanging over the industry in the form of a question: When’s the next border closing going to take place?” he asks.

“We need to develop a Canadian strategy and position ourselves as a Canadian supplier with Canadian attributes that are not necessarily just meat quality, but business relationships and supply relationships as well,” he says.

“Right now our systems are all North/South. We need to start thinking East/West and build systems that target Eastern markets, particularly Japan, China and Korea. I just don’t think the way we’re structured right now – and the way we’re positioned – has a very bright future,” he concludes.

Leo Quigley is a contributing writer based in Canada.
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