1 March 2007

10 minute read

Report Highlights

This report reviews developments in the Canadian cattle and pork sectors that will influence the production and trade of live animals, beef and pork through 2007.

Executive Summary

• Canada’s cattle industry is working its way out of the cattle backlog associated with the initial detection of BSE in Canada in May 2003 and is in a contraction phase.
  
  
• In addition to a significant inventory reduction, the cattle industry entered 2007 with the detection of its ninth BSE case in early February, prospects for lower cattle slaughter, weak beef exports and increasing beef imports.
  
  
• Canada exported 1.0 million head of live cattle to the United States during 2006, almost double the year earlier level.
  
  
• There has been speculation that USDA’s proposed Minimum Risk Rule 2 would result in a flood of imports of older bovines from Canada, but post believes that there are several reasons why this is not expected to occur.
  
  
• Canadian imports of beef and veal from the United States soared to a record $414 million in 2006 reflecting strong demand from Canada’s foodservice sector, lower Canadian beef production, and lower Canadian imports of offshore beef. For 2007, prospects appear to be favorable for further gains for U.S. beef in Canada.
  
  
• Canadian hog farmers ushered in 2007 with fewer hogs on farms. There were 14.3 million hogs on farms as of January 1, 2007, 2.7% below the same date last year.
  
  
• Profitability has been under pressure in the Canadian hog industry. Hog receipts were 13.6% lower than for 2005.
  
  
• Pork production is forecast to be about 3% lower in 2007, reaching about 1.8 million metric tons. It will mark the third consecutive year of a pork production decline in Canada.
  
  
• Canadian live hog exports to the United States reached a record 8.8 million head during 2006, 7% greater than a year earlier. For 2007, post forecasts Canadian live hog exports to the United States to reach about 9.2 million head representing another year-to-year increase of almost 5%.
  
  
• There is a degree of uncertainty among Canadian hog producers surrounding the restructuring actions of Canada’s major pork processors, Maple Leaf Foods. Inc., and Olymel and additional concern surrounding the upward pressure on feed prices related to the feedstock demands of the biofuel industry.
  
  
• Per capita pork consumption in Canada has spiraled to its lowest level in more than a decade falling by almost 25% in the five years ending 2006.

Production; Cattle, Beef

Cattle

Canada’s cattle industry entered 2007 with a significant inventory reduction, the detection of it’s ninth BSE case in early February, prospects for lower cattle slaughter, weak beef exports, higher beef imports, weaker profitability prospects and hopeful expectation that the USDA proposed Minimum Risk Rule 2 (MRR2) will re-establish Canadian access to the U.S. market for older bovines and certain of their meat products.

Inventory Contraction

Statistics Canada data show Canada’s national cattle herd continued to decline in 2006, falling by 515,000 head to 14.3 million head on January 1, 2007 down 3.5% from a year ago on that date. The beef-breeding herd is sharply lower, down 1/4 million head. There were fewer calves born in 2006, and more than 1.0 million head of cattle were exported live to the United States, mostly for slaughter. The inventory statistics confirm that Canada’s cattle industry is in a contraction phase. Post expects this trend to continue and a further important inventory reduction is possible by year-end bringing down the total cattle inventory close to its pre-BSE level.

While the recent inventory data verifies that Canadian cattle industry is working its way out of the cattle backlog associated with the initial detection of BSE in Canada in May 2003 and is in a contraction phase, Post remains of the view that Canadian cattle marketing patterns may not necessarily return to their pre-BSE pattern. We continue to hold that the ability of the Canadian cattle industry to recapture pre-BSE trade levels for beef and cattle will dictate the future size of Canada’s cattle herd.

Beef Production

Last year marked the first full year the U.S. border has been open to Canadian cattle shipments since 2002. In 2006, Canadian live cattle exports to the U.S. slightly exceeded 1.0 million head, about double the previous year, but significantly below the 1.7 million head exported in 2002 (pre-BSE). Canada had exported no live cattle to the U.S. from late May 2003 to July 2005 reflecting U.S. BSE import control measures. As a result, slaughter levels hit record highs in Canada during 2004 and the first half of 2005. Since that time, Canadian slaughter levels have tapered off, partly because the border is open to live cattle but also due to a sharp fall in offshore dema nd for Canadian beef (see Trade Section). Statistics Canada reports that total Canadian cattle slaughter in 2006 reached 4.2 million head, down 7.1% from 2005.

Outlook Points to Lower Beef Production in 2007

The number of Canadian live slaughter cattle exported to the United States will heavily influence beef production in Canada during 2007. Although they have not yet returned to their pre-BSE level, Canadian live cattle exports exceeded 1.0 million head in 2006 and prospects for 2007 suggest they will be close to that level again during 2007. Should this occur, Canadian beef production will be lower than would have been the case had these cattle been slaughtered in Canada. At this juncture, post forecasts Canadian beef and veal output to reach about 1.4 million metric tons, down about 1.8% from the estimated 2006 level of 1.425 million metric tons.

Policy

Would MRR2 Trigger an Increase in Imports of Cull Animals from Canada?

There has been some speculation that USDA’s proposed Minimum Risk Rule 2 (MRR2) would result in a flood of imports of older bovines from Canada. Under current U.S. BSE import control measures, only live bovines under 30 months for slaughter or for feeding in designated feedlots lots and destined for slaughter are permitted entry. Post analysis is that it is unlikely that MRR2 would result in a significant spike of older Canadian live cattle being exported to the United States. In addition to increased slaughter capacity in Canada for cull cattle, the issue of age verification will likely mitigate the number of older Canadian cattle that would be eligible for export. Canada implemented mandatory cattle identification on July 1, 2002 to facilitate traceability, but age verification is currently a voluntary program. As a result, the majority of older cattle in Canada are not age verified. Only about 20-25% of the older cow herd would be eligible for export and while the purebred industries, dairy and beef, mostly know the birth dates of their animals, the average cowcalf producer doesn’t know and can’t prove their animal’s birth dates. In addition, the Canadian cow herd is lower by ¼ million head from this time last year. The public comment period for MRR2 is open until March 12, 2007.

Beef Imports from Non-NAFTA partners

Canada restricted supplementary imports of non-NAFTA beef following Canada’s initial BSE incident of May 2003 when the disruption to exports resulted in surplus supplies of Canadian beef. Under NAFTA, Canada has no quantitative controls on imports of U.S. or Mexican beef (or from Chile under the Canada/Chile FTA), but it does operate a tariff rate quota for beef imports from what are commonly referred to as non-NAFTA sources (mostly Australia, New Zealand, Uruguay, Argentina, etc.).

Canada’s TRQ for non-NAFTA beef is 76,409 metric tons annually. Normally, over-quota imports would be assessed a 26.5% duty, but in the years prior to the BSE outbreak, Canada, at the discretion of the trade minister (and to the chagrin of Canadian cattlemen), had been granting duty-free “supplementary imports” that resulted in large supplies of additional imported “manufacturing or processing–type beef (i.e., ground meat and lowpriced cuts) from non-NAFTA sources. This relatively unconstrained use of supplemental imports from low-cost countries forced Canadian cattle producers to seek higher prices by sending their older cattle to be processed in the United States. As a result, fewer and fewer Canadian slaughter plants were including older, cull cattle in their slaughter mix. When BSE hit in May 2003, Canada lost access to bovine markets in the United States (i.e., U.S. BSE border measures) and no longer had the slaughter capacity to process all its cattle. Canadian strategy then turned to increasing slaughter capacity for cull animals and the GOC suspended supplementary imports of non-NAFTA beef to prevent the Canadian market from being completely swamped by manufacturing type beef.

Currently, Canada continues not to authorize the issuance of supplementary imports to its Beef and Veal TRQ. Canadian cattlemen do not want to see a return to high volumes of supplementary beef imports and recently, the House of Commons Agriculture Committee tabled a recommendation that Canada permanently constrain the use of supplementary imports for beef and veal from non-NAFTA countries. Canada's trade minister has discretionary power with regard to supplementals.

Canada’s 9th Case of BSE

On February 7, 2007 the Canadian Food Inspection Agency (CFIA) confirmed the diagnosis of bovine spongiform encephalopathy (BSE) in a mature bull from Alberta. The finding marks the 9th case of BSE in Canada. The last Canadian cases were July 13 and August 23 last year, also in Alberta. According to the CFIA, the anima l was identified at the farm level by the Canada’s BSE surveillance program, which targets the highest risk cattle populations and has tested roughly 150,000 animals since 2003. The CFIA indicated that no part of the animal entered the human or animal food chains. The CFIA will undertake an epidemiological investigation to identify herdmates and determine what the animal was fed early in its life. These latest Canadian detections are not expected to impact trade with Canada.

Trade

Exports

Canadian beef exports fell sharply during 2006. As shown in the table below, Canadian beef exports to the world (product weight basis) fell 20% to 340,386 metric tons in 2006 from 425,821 metric tons during 2005. Most of the decline was due to lower beef exports to the United States reflecting the re-opening of the U.S. market to live Canadian slaughter cattle by mid-2005. Prior to BSE, the U.S. market has consistently absorbed about 85% of Canadian beef exports and the same is true today, but the reality is that Canada is exporting less beef to the United States.

Canadian beef exports to the United States in 2006 slipped to 289,474 metric tons, a drop of 21% from the previous year level. The average annual growth rate for Canadian beef exports to the U.S. in the five years ending 2006 was –5.6%.

Despite regaining partial access to the U.S. market for certain live bovines, the combined value of Canadian beef and cattle exports to the U.S. during 2006 was more than $300 million below 2002, the last full year prior to Canada’s first case of BSE. In Canadian dollar terms, the combined value of live bovine and beef exports to the United States fell $C1.3 billion between 2002 and 2006, with the significant strengthening of the Canadian dollar over the period accentuating the impact of the market disruption caused by BSE.

In 2002, the full calendar year prior to BSE, Canada exported 80,990 metric tons of beef and veal to countries other than the United States. However, post-BSE, international market recovery is incomplete. The average annual growth rate of Canadian beef exports to non- U.S. destinations in the five years ending 2006 is –8.8%. Canadian beef and veal exports to destinations other than the U.S. fell to 50,912 metric tons product weight in 2006, down 11 percent from a year earlier.

Imports

Canadian imports of beef and veal from the United States soared to a record $414 million in 2006 reflecting strong demand from Canada’s foodservice sector, lower Canadian beef production, and lower Canadian imports of offshore beef. However, despite the record value of U.S. exports of beef to Canada in 2006, on a quantity basis, the level of U.S. beef exported to Canada was merely returning to the pre-BSE level. Almost 90% of U.S. beef exports are destined for Ontario, Quebec and British Columbia. For 2007, prospects appear to be favorable for further gains for U.S. beef in Canada given that Canadian beef output is forecast to fall again if Canada’s live slaughter cattle exports to the United States continue at the 2006 pace.

Further Information

To view the full report, including tables, please click here

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