So, this is what a global market feels like: Supply-side fundamentals coupled with demand have made for a stronger than anticipated fed cattle market and steamy feeder cattle prices. According to USDA's June Cattle on Feed report, placements were lower than expected, marketings were higher than expected, and overall cattle on feed were lower than expected.
Yet, uncertainty driven by wonderments about when the ban on Canadian beef and cattle imports will be lifted continues to throw a wet blanket over what could be even more favorable prices. That's despite the unexpected surge that U.S. prices made immediately following the discovery of a single case of bovine spongiform encephalopathy (BSE) in Canada.
The kicker to this market paradox is that two key U.S. export customers, Japan and South Korea, will likely have as much to say about when the Canadian ban is lifted as the U.S. and Canada will.
On one hand, Ron Plain, Missouri livestock economist, explains that if the ban is lifted soon (within two months), lots of Canadian beef piled up in cold storage and a passel of cattle held back at home will be hunting a new address south of the border.
“That shouldn't be terribly disruptive to the markets here because the market has already been anticipating it,” says Plain. In other words, reining in prices currently equates to taking some of our medicine up front.
On the other hand, Plain says the longer the ban remains in place, the more pressure there is for the Canadian cattle industry to downsize. Where that would lead opens up an entirely different book of assumptions. Some of the chapters in that book would include:
the net effect of having less lean trim to draw on,
the pluses and minuses of having less beef than domestic and export customers demand,
and how much price an over-built cattle feeding capacity can absorb in the longer term.
Keep in mind that, according to USDA's National Agricultural Statistics Service (NASS), there were 5.7 million head of cows, heifers and calves in the Canadian inventory at the beginning of this year. Compare that to 42.1 million in the U.S.
With only one-seventh of the inventory, estimates of Canada's economic loss due to the ban run as high as $25 million/day (U.S.). Using cowboy math, multiply that by seven and it would be similar to the U.S. industry losing $175 million/day. How many of those days can you bank before being forced to shut down?
As it is, the border has already been closed longer than many thought possible following the Canadian BSE announcement May 20. Throw in the coordination Plain believes needs to occur between the U.S., Canada and her primary trading partners before the border is opened, and the prospect grows for a longer, not shorter, closure.
Japan Makes Itself Heard
By now you should be aware that Japan has demanded as a condition of sale that the U.S. implement a country-of-origin certification program for U.S. import purchases by July 1. Plenty of backroom haggling got that deadline pushed back to September 1, but the jury is still out on what program can be implemented by that time that Japan would deem acceptable.
The bottom line is that the global dynamics of the beef business have U.S. cow-calf producers and cattle feeders in a marketing/buying quandary. If the border opens soon, locking in sell prices and contracting calves now may be smart money for producers. If it doesn't, the opposite can be true.
Likewise, predictions of whether or not there will be Canadian calves available this fall plays a role in how much gamble cattle feeders are willing to take on current prices. For perspective, NASS reported 2.2 million head of feeding and breeding cattle imported to the U.S. last year, primarily from Canada and Mexico. If all those were feeders, it would equate to about 9-10% of the annual fed cattle supply.
Now, take this kind of uncertainty and multiply it by some yet known but exponential number. That's what producers here would be facing had the BSE case cropped up here.
It's also a fair indication of what the industry will face in the future without a standardized way to identify and track cattle from beginning to end. As demonstrated by the Canadian case — and they were able to track swiftly and accurately — growing demand by both domestic and international customers for such a tracking capability will provide an economic safeguard in the future if such a system exists, or add to market risk if it doesn't.