Summary - The livestock and meat industries of Canada and the United States are moving towards greater integration. Expanded cross-border trade and investment is increasing market opportunities for U.S. meat exporters in the major population centers of eastern Canada. These export opportunities stem from structural changes in the Canadian livestock industry and the improved competitiveness of U.S. meat in Canada, which, in part, is a result of U.S. and Canadian bilateral and multilateral trade agreements since 1989.
A hallmark of the North American meat market continues to be the integration of the U.S. and Canadian beef industries. Signs of this integration are evidenced in expanded cattle and beef trade between Canada and the United States, as well as in increased cross-border investment in beef processing capacity.
Significant shifts in cattle and beef trade between Canada and the United States are anticipated, as marketing links between the U.S.-Canadian beef industries further develop in the years ahead.
Most important for U.S. exporters, Canadian consumers are expected to purchase more U.S. beef. U.S. beef exports to Canada are projected to increase in 1996 and again in 1997. Larger U.S. meat supplies, competitive U.S. beef prices, and expanded Canadian demand for U.S., high-quality, grain-fed beef are key determinants to expected growth.
Meanwhile, the United States is forecast to import fewer cattle from Canada as a result of the expansion programs of two large packing plants in Alberta, Cargill/High River and IBP/Lakeside. In the years ahead, these plants are expected to purchase Canadian cattle supplies that would otherwise be shipped to the United States.
Canadian hog and pork production has been expanding in the U.S. and Canada over the last several years. U.S. expansion has been caused by a switch from traditional hog production to vertically integrated production, as well as the expansion in the Southeast. Canadian expansion has occurred in much the same way, with hog production shifting East to West, but also through structural changes among processors. Both markets have migrated towards becoming more integrated and less distinct, as product has and will continue to flow easily across the border, courtesy of the U.S.-Canadian Free Trade Agreement and NAFTA. Further expansion and integration will be seen in the future as the two markets continue to mix and meld into the 21st century.
Where the U.S. and Canadian industries are most closely integrated is in the area of processing. In fact, many Canadian pork processors regard their customer base as much American as Canadian. Canadian processors are also keenly interested to see a resolution of the pseudorabies issue which has prevented them from importing competitively priced U.S. hogs.
U.S. pork, at the same time, is making consistent inroads into the Canadian market. In 1988, the year before the U.S.-Canadian Free Trade Agreement went into effect, the United States exported 6,000 metric tons (cwe) to Canada with a 50 percent market share. In 1995, exports were over 23,000 metric tons with an 88 percent market share. This year, U.S. pork exports through July have already exceeded last year's total and are on track to reach nearly 43,000 metric tons, making Canada the second largest market of U.S. pork behind Japan.
Recent trade reports indicate that U.S. beef is very price competitive in eastern Canadian meat markets, compared to other Canadian beef items. Competitive U.S. beef prices have been key to greater Canadian purchases of U.S. beef. The volume of U.S. beef exports to Canada was up 7 percent in the first seven months of 1996, compared to the same period in 1995.
The U.S. share of the Canadian beef import market has increased steadily in the past several years. The United States is forecast to account for about 60 percent of 1996 Canadian fresh/frozen beef imports, up from 40 percent in 1993. Much of this increase is a result of improved U.S. competitiveness vis-a-vis Australia. The Australian share of the Canadian fresh/frozen beef imports dropped from 39 percent in 1993 to an estimated 12 percent in 1996.
The primary products demanded are the hind- and fore-cuts from USDA Select carcasses. Currently, the market for USDA Choice items is limited, because of Canadian preferences for lean beef products. According to trader reports, only a handful of companies purchase USDA Prime.
At the retail case, Canadian product is not differentiated. Traders report that this causes confusion for many beef purchasers. As an example, beef is often advertised as either Canadian A, AA, or AAA. The consumer, however, does not know which and must rely on the purchasing patterns of the retailer, for which he or she may or may not have a basis for comparison.
For this reason, traders report that the United States has an opportunity to distinguish its product to Canadian consumers. To a certain extent, this is already being done. "Certified Angus" beef from the United States is being widely marketed, in black, as opposed to white, tray-packs.
The cattle herd in Alberta has been expanding at a terrific pace in the past several years. From January 1, 1990 to January 1, 1995, the Alberta cattle inventory increased 22 percent to 4.8 million head. As cattle inventories in western Canada increase, those in eastern Canada are declining. In this period, the number of cattle in eastern Canada decreased 3 percent to 3.8 million head. This trend toward a larger cattle inventory in western Canada has accompanied Alberta's emergence as the heart of the Canadian beef industry.
Alberta's beef industry has expanded for several reasons. The Canadian Cattlemen's Association (CCA) reports that Alberta is one of the lowest-cost producers of fed cattle in North America. Large local supplies of barley have been key to increased cattle feeding in Alberta. According to the CCA, nearly 80 percent of Alberta's cow-calf producers are also grain farmers, and many of these have expanded operations to background/feed cattle.
Low feeding costs have increased local fed cattle supplies. This has resulted in expanded cattle exports to the United States. In 1995, U.S. cattle imports from Alberta totaled approximately 600,000 head, most for immediate slaughter. Alberta's large and competitively priced fed cattle supplies have contributed to the establishment of Cargill/High River and IBP/Lakeside.
Expectations for increased beef exports to Asia are running high in Alberta. The CCA has set an ambitious year-2000 goal of capturing 10 percent of the Japanese beef import market. Current Canadian beef exports are significantly less than this target. The current Canadian share of the Japanese beef import market is roughly 1 percent, according to data compiled from the Japanese Livestock Industry Promotion Corporation.
Asia currently accounts for a small portion of Canadian beef exports. For 1996, fresh and frozen beef exports to Japan and Korea are estimated at 7,500 tons and 2,500 tons, respectively, while those to the United States, Canada's largest export market, are projected at 210,000 tons.
In considering greater beef sales to Asia, trade sources report the difficulty of developing the Japanese market. Japanese buyers are becoming ever-more selective in product purchasing and increasing sales of Alberta's barley-fed beef - reportedly a whiter, leaner, sweeter product - is expected to take several years.
Increased Canadian beef exports will depend on the market development efforts of Cargill/High River and IBP/Lakeside. These facilities are expected to target markets in the U.S. West Coast, eastern Canada, and Asia. Cargill/High River and IBP/Lakeside are expected to draw heavily upon the international marketing channels of their U.S. parent companies to further develop international sales.
The expansion programs of Cargill/High River and IBP/Lakeside are expected to increase Alberta's beef production and to reduce Canadian cattle exports to the United States. With this expansion, Canadian cattle exports to the United States are expected to decline from 1.5 million head in 1996 to 1.1 million head in 1997 . By 1998 or 1999, additional kill capacity is expected to further reduce Alberta's exportable cattle supplies.
The Canadian hog industry has been mainly concentrated in the
eastern provinces of Quebec and Ontario. In 1988, they accounted
for 63 percent of total Canadian hog production, with the western
prairie provinces accounting for 31 percent. Presently, Quebec
and Ontario represent 56 percent of the Canadian total, a
reduction of 13 percent in 8 years. This decline has come in the
face of expansion in the west, particularly Manitoba, where its
share of the national total has increased from 12 percent to 15
percent in the same time period.
The concentration of the hog industry in the eastern provinces was due to favorable provincial policies and national transportation policies, and the close proximity of major metropolitan areas of Canada and the United States. However, since the late 1980's, a change has taken place within the Canadian hog industry. The eastern provinces have become more populated and industrial, leaving little room for expansion in the hog sector. Environmental problems have begun to crop up as a result of population centers extending further into the countryside. Processors were facing tougher times as competition from U.S. processors for slaughter hogs forced layoffs due to underutilized capacity.
It was during this time period that hog production in the western provinces began to increase. Much of the increase in hog inventories was a result of high hog prices, a move to diversify farm operations, and the availability of land. Hog prices during the late 1980's were generally favorable, with input prices low enough to provide an incentive for expansion. In addition, the hog tripartite plan was introduced in 1986, as a means of stabilizing producer incomes. Farmers received deficiency payments based on the difference between a calculated support price and the national average market price for a specified period, usually quarterly. Payments were triggered when the average market price fell below the support price. Although not intended to be an incentive for hog expansion, the tripartite payments were unusually high in the late 80's, further prompting expansion. In later years, payments became smaller and less frequent as hog prices remained above the support price. The scheme was completely phased out in 1994.
Changes in the U.S. hog sector have also had influence in Canada. The Midwest, the traditional hog production area, was seeing limited expansion, while the Southeast was experiencing a major boon, particularly in North Carolina. Production was also increasing in less traditional states such as Missouri and Arkansas. These shifts from major production areas were causing a shortage of hogs available for slaughter. Canadian expansion, particularly in Manitoba, helped alleviate much of the problem. In addition, the exchange rate was favorable, providing Canadian producers with an additional incentive to expand.
U.S. industry influence is evident in how western Canadians are marketing their hogs. Traditionally, Canadian hog producers have not been able to employ forward contracting with a particular processor, but rather sold their hogs through their provincial marketing boards. This is now changing as hog producers demand more autonomy over their operations. Several marketing boards have instituted forward contracting as a mechanism for providing the best price to producers. Manitoba Pork est., the Saskatchewan Pork International Marketing Board, and the Alberta Pork Producers Development Corporation have all begun to offer forward contracting to their producers. Price fixing is allowed for up to 12 months in advance of delivery; these programs are not mandatory; and they operate independently of the regular pricing and settlement programs provided by the respective organizations. Under the new mechanism, producers can enter into a firm contract with the marketing board to deliver an agreed-upon number of hogs (usually 50 percent of expected production) within a particular month and at a predetermined price. This allows producers to stabilize a portion of their income and better position themselves for future expansion and development, by planning ahead and leveraging funds. The forward contract prices are based on live hog futures prices from the Chicago Mercantile Exchange (CME), which are then converted to reflect the respective pricing system in each province. Price risk is taken on by the marketing board, thereby shielding the producer from price fluctuations. In addition, Manitoba Pork est. has allowed producers to decide whether to sell direct to packers or to the marketing board. This policy change, effective on July 1, 1996, is a continuation of the commitment made by Manitoba Pork to producers and processors to adopt a freer marketing system.
The eastern marketing boards, the Ontario Pork Producers' Marketing Board and the Quebec Pork Board continue to operate as they have in the past. The Ontario Board currently operates an open Dutch auction market, usually in groups of 300, with approximately 16,000 hogs marketed daily. In addition, producers may contract directly with a processor, either through negotiations or via the open auction. However, final contract approval must be obtained from the marketing board. Although the open auction system has been in effect for more than 30 years, the Ontario board is working with the Manitoba and Alberta marketing boards to create a forward contracting mechanism to offer to its producers. The Quebec Pork Board also uses an electronic auction to determine prices for hogs sold to small and medium packers.
Eliminated on August 1, 1995, the Western Grain Transportation Act (WGTA) was a subsidy provided to producers to encourage the export of grain eastward. It provided an uneven playing field by making eastern hog production more competitive. With this final obstacle out of the way, western producers have been given an opportunity to profitably market their grain through livestock, adding value to the grain. The full extent of how the WGTA elimination will affect future expansion is still unknown at this time. With high grain prices, producers are less inclined to increase their hog production; as grain prices moderate, producers will begin to look towards expanding their herds.
Although Manitoba has the third largest beef cow inventory in Canada (about 510,000 cows on July 1, 1994 or nearly 11 percent of the national herd), the local beef industry has been in decline for two decades. In 1994, the province slaughtered 37,300 head of cattle, way down from 581,000 head in 1976, when the Manitoba industry was at its peak. Important reasons for this decline have been Manitoba's loss of a large packer in the late-1970's and its uncompetitiveness in feeding cattle to slaughter weight. In 1994, more than 200,000 feeder cattle were shipped to other provinces, primarily Alberta and Ontario, and to the United States for finishing.
This may change. Manitoba producers are seeking to capitalize on possible long-run lower feed costs as a result of the elimination of the WGTA and lower rail subsidies for feed grains. Of the prairie provinces, Manitoba is considered the best able to further develop a cattle backgrounding/feeding industry as a result of this policy change, more so than even Alberta. High feed grain prices, however, have minimized any current market impact of WGTA's elimination.
An October 1995 study prepared by the Canadian Imperial Bank of Commerce (CIBC) highlights several developments that may foster cattle feeding in Southeast Manitoba. The price of local barley supplies is expected to become more competitive vis-a-vis Alberta, which has lower feed-grain supplies and more cattle-feeding activity. By 1997/98, the CIBC expects rail freight rates for Manitoba-grown barley to increase C$.51 per bushel, compared to C$.06 per bushel in Alberta. Higher freight rates are projected to result in larger locally available barley supplies.
The availability of land for expansion and the elimination of the WGTA were the most compelling reasons behind the increase in hog inventories in the west. Land is in abundant supply in the west with average farm size well over 1,000 hectare. These larger farms were more suitable for manure disposal and have given western producers a clear advantage over their eastern counterparts. Eastern producers were not so fortunate since their average farm size is usually around 500 hectares. In addition, western producers have been more inclined to move towards 3-site facilities because of the availability of land.
Last modified:Friday, 22-Nov-1996