Beef production in Canada is a high-cost of production environment. The per unit cost of production is dependent upon cash and opportunity costs as well as productivity measures (e.g. reproductive efficiency, feed to gain, carcass weights, etc.). The CCA works to address these issues impacting competitiveness with research through the Beef Cattle Research Council and with government through the Domestic Agriculture Policy and Regulation Committee.
Cow-calf cost of production
Input costs for Alberta cow-calf producers increased by 33 per cent in the 90s and an additional 15 per cent over the last 10 years. Hay prices increased 41 per cent in the ‘90s and another 15 per cent in the last decade. Barley prices increased 45 per cent in the 90s and another 54 per cent in the last decade; increasing the incentive to look for alternative protein sources.
Fuel prices increased 10 per cent over the 90s and have since doubled in the last decade. This makes alternative ways of feeding that reduce the use of inputs to produce, harvest, and deliver feed more desirable. Farm labour costs have also accelerated increasing 15 per cent in the 90s and 47 per cent over the last decade.
Many of these increased costs have also been experienced by U.S. counterparts. However, the difference comes in the price U.S. counterparts received. During this period of increased costs Canadian producers have faced depressed prices with a stronger Canadian dollar and wider basis. It has only been recently with tighter supplies that the basis has narrowed. Returns over cash costs for Alberta cow-calf producers are estimated to have been negative for seven of the last 10 years. This has been a drain on the sectors equity and resulted in consolidation in the industry.
Globally higher feed, land, labour, and other input costs have resulted in a narrowing in the relative cost of production between different countries. Previous low cost producers of beef (i.e. Brazil) have seen land values, labour, and feed prices all increase with increased competition for acres and growing economies driving higher costs. Higher costs in these countries slowed expansion efforts to only 1 per cent annual growth in beef cow inventories from 2006-08. This has since accelerated to 3.5 per cent in 2010/11. As beef prices increased in 2011 only Brazil is expanding with Australia, Argentina and Canada all stabilizing their herds and gearing up for an expansion phase.
Despite its own challenges with high costs of production, Canada has an advantage over many other beef production systems. Our grain-based production system only takes two-to-three years from expansion in the cow herd until larger production is seen. In contrast, grass-based (Brazil) typically take four years from the time the cow herd expands until larger production is seen.
Feedlot cost of production
The fed steer price to feed ratio is an indicator of profitability in the feedlot sector. A higher ratio indicates that fed prices are relatively high compared to feed costs and encourages the industry to expand or at least send a stronger price signal to the cow/calf sector. However, the ratio does not always decline when feed costs increase if fed prices increase accordingly. Canadian and U.S. fed cattle to feed ratios tend to move together in North America with the exception of the 2003 to 2007 period when the U.S. industry saw larger returns. This difference was caused by depressed cattle prices in Canada, an appreciating dollar which pressured profitability and a higher cost of gain in 2007 and 2008 when barley prices were higher than corn. Since 2008 the feeding sector on both sides of the border has seen historically low ratios at around or just above 20:1 indicating that margins are very tight or negative. In 2011, the ratio has been higher in Alberta ranging between 22 and 25 due to a lower barley price relative to corn; in the U.S. the ratio continues to range between 16 and 21.
Feedlot break-even have moved steadily higher over the last decade with a short reprieve in 2009 and the first half of 2010 following the financial crisis in fourth quarter 2008 and the global economic struggles. Without corresponding price increases there has been substantial equity loss in the feedlot sector in North America. While the U.S. feeding sector saw some good years in 2003 to 2008, Texas has since lost as much equity as their Canadian counterparts with Nebraska doing only slightly better.
Packer cost of production
Annual utilization levels have been challenged in Canada and U.S. packing plants as supplies tighten in an industry that already has excess capacity. Annual utilization levels fell from a high of 91 per cent in 2004 to a low of 69 per cent in 2006 before slowly increasing back to 82 per cent in 2010. Utilization levels fell to 77 per cent in 2011, with lower supplies of both fed and non-fed cattle available for domestic slaughter. Lower utilization levels increase the fixed costs that need to be covered by each animal going through the plant. Research indicates that levels below 90 per cent are extremely inefficient. Overcapacity and low utilization rates have resulted in a number of Canadian packing plants closing since the fall of 2006.
Packers are able to make changes in the long run such as reducing the number of operating days in a week. However, these changes make it difficult to increase production over the short term or take advantage of seasonal changes.
Fluctuations in the CDN/US exchange rate have implications when comparing the competitiveness of Canadian plants to their U.S. counterparts. Particularly labour costs, which are negotiated and contract to cover a number of years, are difficult to adjust to the rapid changes in the exchange rate. A par dollar will take a number of years for the packing industry to fully adjust to. In the meantime, the sector must gain efficiencies to compete with U.S. packers. The long list for SRMs (specified risk material) also increases the cost of processing OTM cattle in Canada. Being able to profit from these items instead of incurring the cost of disposal will be important for the industry over the long run.
The CCA is currently working with other Canadian agriculture organizations to establish their policies and principles on ecosystem services (ES). A meeting was held in Ottawa in mid-2013 to present the findings of the CCA taskforce to organizations such as Dairy Farmers of Canada, Canadian Forage and Grasslands Association, Canola Growers, Grain Growers and Egg Farmers of Canada. This group will next begin work to outline a common path forward.
The CCA is exploring ES with industry in alignment with its policy position:
Vision: Societal recognition of stewardship practices that provide ecosystem services.
Mission: To enhance existing and to develop new sources of revenue that will recognize and improve the management of ecological services, thereby supporting ecologically and economically sustainable beef production.
Program principles have been created in the following seven (7) categories:
- Producer Rights - ES programs must respect the rights of the producer.
- Land Use - ES programs must not encourage the purchase of lands with the intention of removing land from agricultural production; Conservation Easements must not restrict agriculture as the primary land use.
- Participation - Producer participation in ES programs must be voluntary and be based on incentives rather than regulations.
- Measurement - Compensation should be delivered for ES that are provided; either by existing, enhanced or new management practices. ES (actions or outcomes) should be verifiable back to the buyer/funder;
ES programs should work towards minimal administrative burden on producers.
- Compensation - Since Society benefits they have an obligation to provide financial recognition of the ES that industry is currently providing. Government should be willing to support/partner by initiating, collaborating on and facilitating ES programs. Crown land, private land and rented land should all be considered. Program eligibility for payment is:
- ES payments should include producers leasing agricultural Crown lands to reflect the on-going value of stewardship.
- ES payments should not go to a type of absentee landowner who is not actively monitoring or working the land for agricultural purposes.
- Payment to renter or land owner will vary depending on the situation and will need to be left to program administration at the local level to determine how best to distribute resources and ensure double payment is not being made for the same land and services.
- Valuing and Payment of ES - CCA recognizes that there are many different valuation methodologies and that a diversity of tools will be useful at the local level. Any program needs to be flexible and locally driven to avoid and rapidly respond to unintended consequences.
- Trade Implications - There is currently no trade restriction to the development of an ES program however this situation should be routinely monitored. That CCA encourage government to develop a program that local groups could apply to in order to access seed money to support regional ecosystem service programs that are in line with the above principles.
Payment for Ecological Services (PES) Programs
A number of common misconceptions surround Payment for Ecological Service (PES) Programs. This document tries to clarify some of these frequently asked questions while using tangible examples from existing programs. Click here to download the PDF document explaining PES.