It's plumb tough to overwhelm market fundamentals. Despite dire predictions by industry Chicken Littles that Canadian cattle would flood south when the border opened, the flow has been a trickle. The market impact has been a non-event.
“If you dig hard enough, you probably could find a small negative impact on price. I'm sure in local markets close to the border there's been more of an impact,” says Mike Miller, Cattle-Fax director of research and development. “But, what we've seen initially is more a psychological impact than a fundamental one.”
For one thing, as of Aug. 4, only 20,000 head of cattle had sauntered south — 9,500 head were feeders. Plus, it appeared most of the feeders coming across were already owned by U.S. operations, Miller says.
Compare that to even level-headed industry projections made just before the USDA rule that allows Canadian cattle younger than 30 months of age to enter the country.
According to USDA's economic analysis of its rule for resuming cattle trade, fed-cattle prices were expected to decline 3.2% and feeder prices 1.3% in 2005. That was on the liberal side. The trade team sent to Canada by the National Cattlemen's Beef Association in January reported USDA's estimate was overstated, as it failed to account for the increase in Canadian slaughter capacity.
Canadian demand increases
More than sheer numbers though, it's the reason for those numbers that's altered the live cattle import picture since the border was last open in May 2003.
“The Canadian industry has added slaughter capacity,” Miller says. “Thus, it's likely that more of their cattle will remain closer to their own packing plants… Plus, the Canadian dollar has rallied considerably the past two years, which makes those cattle more expensive in relative terms (compared to U.S. prices).”
Just as important is the comparable and favorable cost of gain Canadians now enjoy compared to the U.S. Using a 550-lb. steer as an example, Miller says before the border closed, a U.S. cattle feeder figured if he could pay $5/cwt. back of the U.S. market, the Canadian steer was worth buying. Now, demand for Canadian cattle, for the reasons cited earlier combined with an increase in crossing fees of $1-$2/cwt., means they need to buy the same steer $8-$9/cwt. back of the U.S. market. That likely won't be possible on a regular basis.
There's been pressure on the market since the border opened, but Miller says the futures volatility for fed cattle and feeders can be pinned on fundamentals. Namely, beef production is up and consumer beef demand, while strong, isn't as robust as it's been for the past 18 months.
Snubbed to a different post, Derrell Peel, Oklahoma State University Extension livestock economist, explains: “The market has faced a constant barrage of disease and political issues, coupled with growing demand and drought-extended cyclical reductions in supply. It seems to me fed-cattle and boxed-beef markets have finally come back into a more typical equilibrium this summer. Thus, the situation is a bit more typical, at least given where we are with longer term cyclical fundamentals.”
That should hold true even if legal gerrymandering closes the border again. Such a development wouldn't be welcome, especially with other international trade issues still outstanding in Japan and South Korea. But, Miller says, “As you witness these kinds of disruptions, the market reacts to the first one, and then rumor can cause it to react a second time to the same situation. Then, it quits reacting. Barring some dramatic event, I think the market's done reacting to the Canadian situation.”
Bottom line, the numbers of cattle expected to come south just don't add up to much fundamental difference in the great scheme of things.
Corn's the primary concern
In fact, market fundamentals are the reason cow-calf producers should still enjoy historically high calf prices this fall. The peak is past, but calf numbers are still so short — especially as more heifers are retained and cow culling is delayed — that prices should motor along.
That's true despite sustained feedlot losses expected through the fall. Cattle-Fax pegs the red ink at $50-$75/head, but Miller says that shouldn't be enough money lost for long enough to alter the prices feeders are willing to pay for cattle.
Instead, Miller says corn prices pose the primary risk this fall.
“If there's a negative situation with the corn crop, it could take money out of the calf market pretty quickly,” he adds.
None of these bullish expectations are to say the worm hasn't turned, however, albeit at the highest price plateau in history.
“We're encouraging cow-calf producers to understand where we're at from a cyclical standpoint,” Miller says. “We've started to build supplies cyclically; producers need to keep in mind what that means from a pricing standpoint over the next several years.”