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USDA GAIN: Livestock and Products


08 March 2013

USDA GAIN: Canada Livestock and Products Semi-annual 2013USDA GAIN: Canada Livestock and Products Semi-annual 2013

The erosion of Canada's feed cost advantage, the closure of a cow cull plant and developments at a major beef packer will significantly drive cattle exports up. Slaughter and beef production will likely reach lowest levels in 15 years, as will beef exports. The hog sector weathered high feed costs better than expected. Hog exports are revised higher, and so are pork production and exports

USDA GAIN: Livestock and Products

Cattle and Beef

NOTE: "NEW Post" data reflect author's assessments and are NOT official USDA data

 

NOTE: "NEW Post" data reflect author's assessments and are NOT official USDA data

In this report, Post's revised data differ from most of the official USDA cattle and beef estimates for 2013, in order to reflect various changes in market conditions observed over the past six months. Some of the major factors that triggered these forecast revisions include: the continued impact of the changes that took place at the XL Foods beef plant in Brooks, Alberta, following the detection of E. coli O157:H7 back in September 2012; a revision in calf crop estimates for 2013; the continued erosion of the feed cost advantage that Canada enjoyed over the past couple of years.

Discussions with the Canadian cattle sector led Post to revise downward the 2013 calf crop estimate to 4,475,000 head. This number is 55,000 head lower than the official USDA estimate. There are suspicions that, despite de 2011 agriculture census, Statistics Canada calf production estimates remain somewhat overvalued. The new post revision brings this indicator more in line with the beef cow productivity levels observed over the past several years.

Post revised upward total cattle exports to 875,000 head, 175,000 head higher than the official USDA estimate. Several factors are at the basis of this revised forecast.

First, the sector continues to feel the impact of the E. coli outbreak at the XL Foods beef plant. This plant is responsible for roughly one-third of the total Canadian slaughter. Its license to operate was temporarily suspended by the Canadian Food Inspection Agency (CFIA) on September 27, 2012. The plant was allowed to resume operations on October 23, under enhanced CFIA oversight. The enhanced oversight lasted until January 14, 2013, when the plant resumed operations under normal CFIA oversight. Here is the complete timeline of events for this E. coli outbreak. The plant was not allowed to export beef and beef products to the United States from September 13 to December 8, 2012.

During this period, the plant changed ownership: JBS is now the new owner of XL Foods. At the time of reporting, JBS has not aggressively procured Canadian cattle. At the same time, the company has a beef plant in northern Utah which also procures cattle from Canada. JBS's decisions in the coming months will impact on the number of cattle being exported to the United States. In addition, before the E. coli outbreak, XL Foods slaughtered bulls. Slaughter ceased in September 2012 when the plant's operations stopped. To date, no decision to resume the bull cull was made. As a consequence, Post estimates that in 2013 up to 25,000 bulls could be exported to the United States for slaughter.

A second development, which impacts cattle exports in 2013, was the closure, in May 2012, of the Levinoff-Colbex beef cow slaughter facility at St.Cyrille-de-Wendover in Quebec. That plant processed most of the beef cows in eastern Canada. Post estimates that in 2013 up to 75,000 cows could be exported to the United States for slaughter because of this plant closure.

Finally, the driving force behind the increased cattle export estimate for 2013 is the erosion of the feed cost advantage that Canada enjoyed for the past couple years. Feed prices in Canada have slowly aligned to the feed price levels in the United States, and there are indications that crop producers are taking advantage of this by increasing feed exports. This trend, coupled with the expectation of a regular crop year in the United States will result in more cattle being exported south of the border for feeding and/or finishing. This category of cattle comprises the bulk of Post's revised cattle export figure for 2013.

Canadian Exports of Non-diary Cattle to the US

Source: Global Trade Atlas

With fewer cattle available in the country, the slaughter forecast was revised downward by 85,000 head to 2,900,000 head. After experiencing an average increase of almost 30 pounds in 2012, carcass weights are expected to remain stable in 2013. With this assumption, and given lower slaughter, Post adjusted downward Canada's beef production by 30,000 MT to 1,025,000 MT. Beef supplies will remain very tight, and are likely to hit record low levels, possibly not seen in more than 15 years.

Canadian Beef Trade

Source: Global Trade Atlas / *Post estimate

Given the beef production outlook presented above, trade will be impacted correspondingly. Post revised upward Canadian beef imports by 25,000 MT to 315,000 MT while, at the same time, revised downward beef exports by 75,000 MT to 340,000 MT. Japan will be a market with potential export gains, given the recent decisions to remove the 21 months age restriction for cattle and to allow imports of beef coming from cattle under 30 months of age. However, as the supplies of beef remain limited, increased exports to Japan will have to come from reduced exports to other markets.

CANADA: Total Beef Imports (Quantity in Metric Tons, CWE*)

Source: Global Trade Atlas / *Conversion to carcass weight equivalent (CWE) at 1.4 for fresh, chilled and frozen meat, and at 1.79 for salted and processed meat

 

CANADA: Total Beef Exports (Quantity in Metric Tons, CWE*)

Source: Global Trade Atlas / *Conversion to carcass weight equivalent at 1.4

Hogs and Pork

NOTE: "NEW Post" data reflect author's assessments and are NOT official USDA data

 

NOTE: "NEW Post" data reflect author's assessments and are NOT official USDA data
All data in 1,000 metric tons, carcass weight equivalent, except slaughter in 1,000 head

In the fall of 2012, Post reported that the prospect of high feed costs and a reduced demand for feeder hogs in the United States had the potential to jeopardize the recovery in the hog sector. At the time, Post anticipated that, facing higher costs and struggling financially, smaller producers would start liquidating their inventories, and the sow herd would decline substantially.

While producers' concerns regarding feed costs remain valid, and their financial situation continues to be fragile, the magnitude of the herd liquidation was vastly overrated. Most producers remained in business and continued to produce as usual, on expectations of improved hog prices supported by sustained demand and tight supplies.

As such, Post revises upward the sow herd estimate for the beginning of 2013, up by 20,000 head compared to the USDA official estimate. As a consequence, with more sows remaining in production, the pig crop is also revised higher, by 350,000 head. Post now forecasts the overall hog supply for 2013 higher by almost 1 percent compared to the USDA official estimate; however, this remains about 0.5 percent smaller than the 2012 estimate.

As the feed price scare fades away, the demand for Canadian feeder hogs is expected to return to more normal levels, and this is what will drive the estimated change in hog exports in 2013. Compared to the USDA official volume, Post revises upward by 100,000 head to 5,650,000 the total hog exports for 2013. This level is comparable with the 2012 hog export level that stood at 5,672,000 head.

Canadian Exports of Non-breeding Hogs to the United States

Source: Global Trade Atlas

Hog slaughter is expected to remain unchanged compared to the USDA official estimate; however, carcass weights changed, and have now an impact on pork production. While it is estimated that in 2012 weights increased by almost 1.5 percent compared to 2011, 2013 carcass weights are anticipated to decline by about 0.5 percent. This is due to the fact that, given the higher feed costs, producers prefer to sell the hogs quicker, while packers are willing to take in these lighter hogs given the need to supply a very tight market. Nevertheless, despite the anticipated reduction in weights for 2013, carcasses will still be heavier than previously estimated and, therefore, Post adjusted upwards by 20,000 MT the pork production, compared to the USDA estimate.

Canadian pork exports are likely to be impacted by a number of factors in 2013. First, starting from December 2012, the Russian authorities have prohibited the importation of pork containing ractopamine. The Canadian industry and authorities have so far complied with all requirements set by Russia, and there is no reason to believe that they would not continue to do so throughout the year. Russia grew to become the third largest pork export market for Canada in 2012, and, in 2013, it is likely to become the second largest market. This development could happen based on several factors. On one side, Canada's exports to Russia will increase if the United States remains locked out of that market. On another side, exports to Japan (currently the second largest export market) are expected to remain sluggish because of a weakening in the Yen, making imports from Canada more expensive.

Second, pork exports to South Korea are likely to see an additional decline. As the U.S.-Korea FTA continues to be implemented, tariff cuts are making American pork increasingly more competitive in that market. Simultaneously, the Korean pork industry recovered fully after the 2011 FMD outbreak and returned to previous levels of production. Third, in a recent development, the Chinese authorities have placed additional ractopamine-related requirements on U.S. exports of pork to that market. To the extent the United States may not be able to meet those requirements, Canada could partly capture some of their lost market share.

Finally, the Comprehensive Economic and Trade Agreement (CETA) under negotiation between Canada and the European Union, which at this point is reportedly very close to completion, is not likely to have a major impact on pork exports in 2013. Aggregating the influence of the various factors described above, Post revised upward the pork export estimate to 1,235,000 MT, 40,000 MT higher than the USDA official estimate.

Canadian Pork Trade

Source: Global Trade Atlas / *Post estimate

Post also revised upward the pork imports estimate to 245,000 MT, 20,000 MT higher than the USDA estimate. It is expected that, as U.S. exports of pork cannot reach markets such a Russia, or potentially markets like China, additional volumes of pork will be shipped to Canada.

March 2013

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