Episode Transcript
[00:00:00] Speaker A: All right folks, we got Brenna Grant with Canfax joining me here for this week's episode. Again the second of two cattle specific podcasts recorded June 18th in Madden, Alberta. Cows and Control put on a great event, so let's get into it. Episode 132 coming at you right now.
Hey folks, welcome to the what the Futures podcast, your quick guide to better farming decisions.
All right folks, welcome into episode 132 of the what the Futures podcast, of course recorded each and every week in the UPL studio. This is the second of a little cattle miniseries here that we've got going on. Ryan Copperthorne with Cows and Control letting me record a couple of sessions. So I certainly do appreciate it. We've got Brenna Grant here joining me this week from Canfax and I fingers crossed, I hope I get into Brenna's good books because I would like her to be a regular on the what the Futures podcast. You guys know I'm an idiot when it comes to cattle marketing and so all the help I can get is great. Yeah. So we have again part of our six episode miniseries here. This is five of six. The last one of course is going to be the crop marketing Meet Cool conference brand in Manitoba. We're going to launch that sucker here in just a couple of days.
But leading up to that here we've got one more market update. Brenna's going to talk about the weather, what they see for moisture again. That's a big deal for all farmers. Grain and cattle, cattle numbers, cow calf producers, what are they doing with their marketing slaughter numbers? It goes on and on. What is the themes out there from the consumer? It's really to me, I was enlightened in many different areas.
But the pulse that the rancher has on consumer trends, so much closer in my opinion than than a grain and oil seed producer. They really know what their customers, what their tendencies are, what they're, what they're spending their budgets on. There was a lot of data about that, of course, Brennan, she's going to talk about break even, she's going to talk about the direction of cattle prices here as well. But really, really cool stuff. But I definitely really noticed or I noticed in a big way how dialed in the rancher is to just that consumer trend. So I'll quit talking. We're going to jump into this one. Brenna is going to be talking about weather as we get going here. We kind of, I kind of fumbled it audio wise at the start. So we're just going to jump Right into this presentation. Get after it here for episode 132 of the what the Futures podcast.
[00:02:52] Speaker B: So the Canadian Drought Monitor is significant improved across the board. Matt Makins, who does our quarterly weather outlook that got published earlier this week, is looking at more normal summer moisture for Saskatchewan, Alberta and southern Ontario. We still have dry spots in bc, Manitoba and northern Ontario, but it is significantly improved from the outlook six months ago.
The real question is the US The US still has a lot of red on that map. What has improved has been the Corn Belt area.
And the forecast with the move to El Nino is the fact that the southern half of the US Is supposed to get rain at some point between now and September.
So yes, timing is a real question for this U.S. forecast.
But there are a lot of beef cows in the southern US that if they got rain this summer, we could see potentially more heifer retention this fall with implications on fall run.
But this also has implications on feed costs. And so we saw a big rally, 23% up since February on barley. This was China coming back and buying Canadian barley primarily for malt. They had gone away and not bothered us for a while and they'd been buying Australian barley, access issues with Australian barley. They came back and started pulling really heavily on Canadian and US Barley. And that's what has caused this rally. The problem with our barley market is that when China starts pulling it for malt, we really get unhinged from our feed grains market and our price arbitrage with US Corn because this is what the US Corn futures look like. We've seen basically the weather premium that had been in the US Corn market when they had been a great big red blob on that drought monitor really come out in the last three weeks. And this has really seen an improvement in terms of expectations as we've seen seeding progress in that US Corn area.
So overall we're looking at Canadian barley being up about $10 a ton over the next year.
US corn prices less so. But bottom line is we are expecting feedlots to shift from barley back to corn. We've seen a lot of these feedlots get comfortable with corn post 2021 drought. And they're making that shift because based on price competitive much faster as they see these price swings in feed sources.
In terms of where are we at in the cattle cycle? We were up a modest 2% on our beef cows January 1st. So we have started to turn in terms of our cattle cycle. But we need to remember that we are the ant riding on the back of the elephant that is the US Market.
We can expand our herd and have very minimal impact because our prices are set in that larger US Market.
We're really waiting to see what the US Herd does because they are not in expansion yet because of their drought conditions.
So for us, though, even though we are expanding, I want to draw your attention to the fact that our breeding heifer numbers, even though they were up 5% Jan. 1, are still below where they were 10 years ago, which means we are still aging our herds, and we have more cows over 10 years old that are going to be coming up for culling in the next two to three years, which means we actually need more heifers to be available and retained in order to replace those that would normally be going out just in terms of regular culling. And that's just to maintain the herd, let alone be expanding the herd in terms of inventories and production. Side of things, you're like, how can we be so tight and yet have such big cattle on feed numbers? Couple of things we'll talk about feeder imports, but the big thing here is more days on feed. So when supplies get tight, packers sell pounds of beef.
So they will take those pounds of beef however they can. And if that means monstrous carcass weights, that's what they're going to pay for, and that is what they're paying for. So to do that, we are keeping cattle on feed 30, 60 days more than we used to. And so a lot of this is not just some of these larger placements that we saw in the first quarter, that we really just shifted placements from the fall into the first quarter, but also the fact that we've got more days on feed, so we have lots of numbers on feed and supplies here in Canada.
The other thing that has really supported this is the fact that even though we didn't see a cow herd expansion after the 2015 price peak, very much what we did see is a cattle cycle driven by this change from being a net exporter to being a net importer of US Feeder cattle. And so we definitely saw this driven by the competitiveness of our feedlot sector.
And when we look at what's happened here in the first quarter is not only did we import an additional 100,000 head last year in terms of net imports, but we are up again, particularly in March and April, in terms of our numbers. We actually have more cattle on feed and more numbers in general that are going to be coming to market in the second half of the year, particularly in Canada.
[00:08:43] Speaker C: That driven by a natural advantage in feeding Canada.
[00:08:47] Speaker B: So we're importing feeders from the US we're importing corn from the US we are doing that for a whole host of reasons. And maybe we should leave that for a beer conversation, because there's a whole pile of reasons of why you would actually do that as a cattle feeder. And one of them is the overhead conversation in terms of understanding and counting those overheads and the fact that there is a really strong incentive, given the number of new pens that have been built in the last five years of keeping those pens filled in order to pay those overheads. And we've also plugged in in terms of supply chains with calf ranches that do beef on dairy in the US and so those supply chains that are funneling cattle into the southern Alberta feedlots, that's not going away and anytime soon. Where you know the comment about the opportunity to expand for cow calf producers here in western Canada is the fact that we're also importing a lot of straight beef calves, particularly out of Montana and Idaho. 60% of those imports are Montana and Idaho beef calves.
That's your competition. So this is just overall to give us context of where we are to remember in terms of we tend to talk cattle numbers, we tend to cut beef in cow inventories. When we talk about the cattle cycle, this is slaughter numbers. And so we, we're down modestly year to date. We are expecting to be up at the end of the year because of those increased inventories and supplies coming in the second half of the year.
All of this decline in our fed numbers is coming entirely from reduced heifer slaughter.
Our steers are actually up 2%. And so we are seeing definitely that heifer number impact on the beef production side of things.
But when you think about those record large carcass weights and we're still seeing record large carcass weights in both the US and Canada, our production is actually up 1% here this year, year to date, and are expecting to be up modestly for the year.
What you can see here when you go back historically is when numbers start declining, you can compensate with large carcass weights for a period of time within the cattle cycle. And then what happens is you can get so back here in 2010, 11, we actually had a little pop up and then we had tighter numbers and we got so current that we had smaller carcass weights and all of a sudden things shrunk.
This kind of a period right here is kind of what we're seeing again as this pop up with Things being supported with those imports and, and with those carcass weights.
That support on our beef production side has meant that we've been exporting around 500,000 tons, which is about 50% of our domestic production and our exports.
We had the good news that China reopened to Canada back in January.
They reopened to the US in May.
And why does that matter and why do we care?
Is also because in January, China put in a beef safeguard.
They said, we're going to give everyone that we're importing from a quota. And after that quota, a 55% tariff is going to go on.
For most of their suppliers it was no big deal, but for Australia and Brazil, it was a big deal.
And consequently, as of the end of May, Australia's quota is 90% full.
Brazil's is, depending on the data source, anywhere between 70 and 80% full, which means they are going to hit that quota end of June, early July, at which point they are out of essentially the Chinese market.
Now, for Australia, they're only about 100,000 tons that they have to diversify.
They can probably find markets for that.
Brazil is looking at around 500,000 tons, so equivalent to our entire annual year's exports.
Now, they've been pulling cattle forward because they couldn't figure out a quota management system where they allocated it to all their different exporters, which meant it was a first to the door to get all of this product done. So in order to do that, they started pulling cattle forward. They killed them at lighter weights, they slaughtered a lot of females.
And so even though they've done this, their expectation is that they're actually going to see smaller production in the second half of the year because they don't have the animals available and they weren't finished to those full weights.
It's not going to be the full 500,000 tons that they have to diversify.
[00:13:45] Speaker C: Why did China want to diversify sources of beef and two in the back half of 2016. Do we have to be worried about Brazil dumping a bunch of meat onto the market?
[00:13:54] Speaker B: That's exactly where we're going. So why did they want to do it? So this was to protect their beef producers.
They actually spent three years and went through proper WTO channels and analysis to do this.
The 55% is, and we've actually done this analysis for Canada and Mercosur. It is what is required in terms of addressing the difference in cost of production and competitiveness that the Brazilian market has in terms of that dumping. And what they were seeing was they were seeing their Domestic beef prices suppressed. That was having a negative impact on their domestic producers. And so this was purely to protect their domestic producers. They have seen their retail prices come up. The concern is that the quotas that they have put in place, they are going to actually see their retail prices skyrocket in the second half of the year.
It depends. China does a lot of things with their cold storage management where they dump a lot of stuff into cold storage and then they pull it out later when they need it. So it's not necessarily going to have the impact on the Chinese market that some people are expecting.
But for Brazil, the expectation is they are absolutely looking at the North American market for the second half of the year.
So some of the US trade deals to do trim only tariff free sort of stuff. They are definitely looking at that. That is the highest priced market next to China for them. It's also one of the reasons why they're pushing on the Canadian Mercosur deal in terms of price spread on cost of production. Between you guys and mercosur producers, they're 60% cheaper straight up. They don't have the same regulations you have and they don't have the same cost structures you have. It's a completely different environment.
And so that is one that it is definitely a risk to the entire North American beef market of how much is going to come in.
However, right now in North America we have a two tier lean trim market.
Right now imports coming into the US are $1.50 a pound lower than domestic lean trim.
And the reason for that two tier market is we have big fast food restaurants like Wendy's who are committed to a fresh, never frozen patty that is domestically sourced.
For them to go to an imported frozen product, yes, it would be cheaper by summer. Expectations are that the price spread is going to be at two bucks a pound.
Those companies at this point have said we're not ready to make the switch.
We are committed to that type of product for our consumer. And so we are definitely having the questions among analysts of at what point does the price spread make someone actually cave and change their procurement.
There have definitely been some fast food restaurants who have done that, but at this point, not yet. For some of the majors in Canada, we have seen absolutely our imports increase to the highest level since 1993.
A big part of this is going to come in a few moments when I talk about per capita consumption and the fact that we've actually needed imports to keep beef on the plate for Canadian consumers so that we don't lose more market Share to pork and poultry.
But we are sitting at really solid demand. And so we talk about we're sitting at these record high prices. What could change it?
Demand erosion could change it.
And that's sort of the thing is we've basically erased some of the demand erosion that we saw in the 80s and 90s due to the whole saturated fat red meat is unhealthy for you rhetoric. As the whole protein movement has been going on in the last several years and like North America is having this protein moment of really pushing high protein diets. We saw this back in the early 2000s with Atkins diet and south beach diet. That was sort of a 10 year movement with about two to three years where it was like a frenzy between 2003 and 2005.
And so we're all kind of wondering where are we at in this whole protein moment place? Are we at that frenzy point or are we just in the middle of this 10 years of really just pushing protein?
And there's a lot of things that are pushing this. We saw the US Food Guide come out in January where they flipped the pyramid and they basically put at the top red meat eat real food. Single ingredient food was the big push. And recognizing the the role that livestock protein has in a healthy diet.
Sean mentioned Ozempic and all of These weight loss GLP1 products that are out there. That research is now becoming available in terms of what is this doing in terms of consumer purchasing. And anyone who's on that product or has someone within their household on it is definitely seeing a change in buying habits with an increased purchases of all proteins, not just beef, pork, poultry, seafood, all of them in terms of increasing the quantities.
But if you have the income to afford it, you probably have the income to afford steak, not ground beef as well.
So per capita consumption data came out from Stats can and we have been on a general decline over the last 25 years and we did pop up 3.5%.
We had been stable between 2015 and 2020. The decline since 2020 is the fact that we have not been able to keep up with population growth within Canada. It's been growing faster than what we've been supplying to the domestic market. In contrast, the US has been steady to slightly higher since 2015 on their beef consumption. And we've also seen just with that general decline in Canada that, that that gap between Canadian consumers and consumption of beef is just getting wider and falling farther and farther behind the US and what their consumption is, which is larger. And in terms of total protein consumption, while The US Is above their long term average. With this protein moment, Canadians are actually still below their long term total protein consumption per capita.
There may be a lot of Canadians out there that want to eat more protein and are simply it's not available or not within a price point that is affordable for them.
When we look at this, this is Canadian when we were flat, you see, these expenditures were flat. As we've actually been rationing our per capita supplies in Canada, we've seen this increase in this willingness to pay of they're actually paying more for less product in order to try to keep beef on the plate. And so one of our biggest challenges in Canada is actually supplying our largest and most stable market, which is our domestic market.
So moving on to US markets. So the US Market is trying to stabilize. They're a wee bit behind us in this, but we're continuing to see cow slaughter, particularly beef cow slaughter drop.
And that is the first indication for cow calf producers trying to stabilize is let's not liquidate these cows anymore.
But you can also see here their total cow slaughter, cattle slaughter is expected to be the lowest since 2015.
And so as I mentioned, carcass weights are a big part of this story to support overall beef production. So they're only down 5% instead of 7 or 8 on their production year to date.
USDA is projecting that they're only going to be down like 2% by the end of the year. I'm still trying to figure out how they're going to do that, but it might be closer to down four when they get to the end of the year.
But they really didn't have the pop in placements in the first quarter that we saw in Canada.
And these placements in April, if they continue to put them 30, 60 days more on feed, that pushes them into the first quarter of 2027 and so not going to for the fourth quarter of this year in terms of production.
But the big challenge for the US Market has not just been drought, has also been the border closure of Mexico that started in November of 2024 and has been on and off last year, but has essentially been closed since last July.
Historically, the US imported 1.2 million head of Mexican feeders into Texas feedlots. So this has been a significant supply loss for them here in the last two weeks.
They have now had screwworm 12 cases in Texas.
And so Canada has banned imports from Texas. Mexico has actually banned imports from Texas. At this point. The big thing, yes, the big thing is what does this actually do in terms of supply and demand. And the real question the week it was announced where the futures were very volatile is how was the US Media actually going to spin this? Was this going to be a pink slime event, a swine fever event?
You never know what a US media is going to do. And so there was huge relief across the industry when the media actually for once got it right and they understood that there was no food safety concerns, that this was a production limiting disease.
And that sort of was the main thing. And so anyone who sees news releases out of industry associations and you're like, that's so stupid to put in there.
That's because that's what we want the media to understand is it is not a food safety concern.
Consumers do not have to back away from beef within the US in terms of a demand erosion event on the supply side.
Really important to understand that USDA's protocol is to treat, not cull or destroy these animals.
They have four products now that are approved. And so it is a very treatable disease. It is labor intensive. There are definitely movement controls on producers, but it is not expected to have a major supply implications outside of the movement limitations and that border closure with Mexico. And I'm sure these guys will add more later to this. But the question earlier about US heifers and what's that doing in terms of supply?
We're moving in the right direction in terms of heifer retention. But you can see here that they're still above the long term average in terms of heifer retention. So we're not in a retaining heifers yet.
Really. They need to drop below the black line, that 47% threshold. That would say they're in a expansion sort of level of heifer retention for the US Herd. And that's why we're watching the US Weather so much is the expectation is if they get rain that this could drop below in 2028. And got to remember, supplies get smaller before they get bigger. And when supplies get smaller, that is price supportive. And so what happens with heifer retention this fall will impact fall run and calf prices. Cutout values on the demand side have been disappointing this spring. We were expecting these to be over $400 by now, and they're not. We're kind of stuck in that 396 range. We have seen a few pops here in the last couple of weeks. We're waiting for enough heat to actually really kick in that grilling demand. But we've seen some of the US market struggle, particularly on loins and ribs. Those Middle meats. We're definitely seeing some of those economic pressures come out and that switching down within the category to cheaper products such as ground beef.
Cow prices though have definitely been supported by these strong lean, trim prices. We're probably close to our peak here in Alberta for prices around that 250.
And we usually seasonally decline going into the second half of the year.
We've got to remember that some of this price support that we saw last year where we kind of move more sideways and didn't have that seasonal decline was due to the US tariffs.
They put in that additional 40% on Brazil between August and November and then it got taken off. So some of this rally that we saw here was due to some of those outside influences that we're not expecting to see this year.
In terms of fed cattle prices, we're probably really close to our highs this week. Maybe we might see that high. And then we're looking into that seasonal pressure into the second half of the year. We usually make that low in October.
We've got a pretty wide range here of what that could be. And part of it is the question on that pressure from Brazilian imports coming into the second half and how this demand holds up throughout these summer months. And if we see that grilling demand kick in.
Yearlings, someone mentioned yearlings and margins on yearlings earlier.
So we have been sitting around that $5 on heavyweights.
We really haven't seen much of a seasonal move upwards that we would normally see post March.
But when we look at 5 year index or 10 year index, we're looking at prices around that 566 to 574 come August, September, we really haven't seen much in terms of eight weights on the Ford delivery sales. Most of the forward delivery sales have been over 1,000 pounds.
Calf prices, we've been sitting around that $7.
And Alberta has been the premium market across North America with the highest priced calves. When you look at a 10 year index out to the fourth quarter would be looking at an average of 375.
We've seen five weights on Ford delivery sales for October at $7.33.
So right in line with that 10 year index.
And then if you look at the five year index, so the last five years as we've seen these prices rally, that would put us in the fourth quarter at around 780. And we have seen December prices on the forward delivery above that.
So this is one where everyone keeps asking when is this market going to turn?
Well, according to forward delivery prices of what's been sold for feedlots are not expecting it to be this fall.
That there is still going to be price support going into this fall.
[00:29:36] Speaker C: This is the part where we cheer.
[00:29:47] Speaker B: So last May I was at an LMAC event and I was talking about $6 for the fall and they all were like you. They're like, no.
So the reality is some of these forward delivery sales have actually been really good predictors of expectations for the fall run the last couple of years. And it's part of the reason why we share them is because they are actual sales that have occurred.
[00:30:12] Speaker C: Sorry, quickly. What's the wrench in that? What like, what's the like is like some people thought it was the Iran war creating economic hardship in the US like what's the thing to look out for that changes that changes that.
[00:30:31] Speaker B: So there's a couple of things. So the demand side, you know, and we've been talking about demand and demand risk and demand erosion for four years now. And you want to know what? One of these years I'm going to be right.
So I'm going to keep mentioning it because it is a real risk on that side.
And part of what actually makes that demand erosion real is coming back and looking at this break even for feedlots is when you look at what they've been paying this spring even over and above what they paid last fall, that's what it does to break evens at the feedlot. Now part of the reason why they're willing to pay more is you look at that cash line which is the black dots, it's well above their break evens, it's well above what was hedgeable.
They've been buying offside from the futures market for two years or so and it's been paying off on the cash for them. And so they have the margin to reinvest into these feedlots, into these calves and feeders and they're absolutely doing that. The great contrast here is Ontario and the fact that they've had higher breakevens than western Canada and lower prices this spring. And it means they've had less margin.
And you can tell the implications on what it's done to their feeder market because they jumped in March and April to catch up with the west to hit that $7. And they've been going back down because their feedlots are not going to be able to make it work because they don't have that same margin that the guys in Alberta have. And so there is some of this cap in terms of that feedlot margin that is just compounding and coming back to the cow calf guy that is not actually happening in some other regions.
What would be another thing is if the US ends up in a second year of drought and all of those heifers come to market this fall, then those calf prices really aren't going to happen because the tight supplies aren't realized yet.
And they're going to back off on those bids because there's going to be a supply situation.
I'm just going to wrap up here with a wee bit of talk about bread heifers for anyone who's bought bread heifers or is thinking about buying bread heifers. And maybe you paid the 5640 for bread heifers last fall and are a wee bit nervous about what on earth did you do to your cost of production for the next 10 years. The reality is when we think about rules of thumb and buying a bread heifer at 1.6 times the value of a 550 steercalf, that price is actually pretty reasonable. We saw a lot of discipline in that market last fall for the cow calf producers. But this is something that we do in our monthly market sense for cow calf producers and we say, okay, look at some scenarios. So if you paid that 5,450 and we use an annual all costs in this is everything in at that 1500 for your annual cow costs because we need a return to labor and you get eight calves out of her, I basically put the price peak at $7 and then I added in your heifers at your regular price slide to get your average for the next three years at 636.
I then dropped it about 26 +% for a year's calves four through eight and that gives a healthy margin.
But we all have that female that comes up open as a three year old.
We don't like her. We'd like to think we're better managers than that, but the reality is it happens. And so if she only has seven calves, she's actually negative.
What happens if you're a Debbie Downer? Because there's one in every crowd and we're going to actually take these prices back 20%, drop them to five bucks and four, she's actually, if she has eight calves, she can still be positive the bottom.
But if you're a high cost producer, and this is more reflective of our coastal provinces like B.C. and the Maritimes or Eastern Canada, at just under $2,000, it actually is negative.
And if you're high cost and only seven calves Then it's very negative.
Now, every cow on your place is not going to be profitable, but you need more profitable cows than unprofitable cows on your place.
So this is just some scenarios to think through, okay? What is an appropriate price for a bred heifer for your operation? And that's why we talked about knowing your cost of production for your operation and your herd this morning, so that you can plug it into some of these things.
I'm probably over time, but I think we're good.
[00:35:22] Speaker A: Again, big thank you to Brenna Grant for allowing me to record her presentation. And like you guys all heard it there, great intel, you know, phenomenal day down in Madden, Alberta. We had a great time. And Ryan, of course, Ryan Copperthorne, he put on a presentation as well. I had to duck out a little bit earlier to make it home in time that evening. But we're gonna have him hopefully live on the show, doing his presentation here because he's got some good risk management strategies that, that we all want to consider. So if you like the show, folks, tell your friends, tell your neighbors, go give us a like or a rating, of course. Or you can reach out to Ryan at what the futurespodcast ca. Nobody has said diddly squat about if they like the shorter formats or not. So what you're telling me, guys is go back to an hour, hour and a half session on Fridays, like don't be a stranger. If that's not the case though, let me know if you like the shorter stuff. All right? For the what the Futures podcast. My name is Ryan and I'm out of here.
