Canadian beef depends on U.S.

News
Sep 14, 2012

A recent report from Canada points out the country’s dependence on the U.S. as a market for its cattle and beef. This fact is inspiring concern and the report calls for changes to recapture lost competitive standing and international market advantage.

The report, released Monday, Sept. 10 by the Canadian Agri-Food Policy Institute (CAPI), raises concerns about Canada’s beef trade stability. As it stands, Canada’s beef industry depends heavily on the U.S. market for its exports, and imports back large quantities of high-value processed items. Citing trade imbalances with the U.S., the report calls for a strategy to recapture its market position and a strong commitment to execute the strategy.

The report—Canada’s Beef Food System—cites Canada’s trade balance with the U.S. as a “paramount concern” facing the Canadian beef industry and that the country is overlooking opportunities in other trade markets in its dependence on the U.S. market.

According to the report, 85 percent of Canadian cattle and beef are exported into the U.S., a value of C$1.8 billion (approximately $1.85 billion; all figures using C$ established using exchange rate where C$1 = $1.02 as seen last week). The downside of considerable concern to CAPI is that this is “backfilling” the U.S. beef export market, meaning the U.S. is reaping trade rewards by expanded export business around the world on beef and cattle supplies built up with Canadian product.

“The value of beef exports to other countries often exceeds the value received for Canada’s exports to the US,” the report reads. “Such substantive dependence on the US appears to be costing Canada valuable opportunities.”

These opportunities come in the form of forgoing more newly-opened markets such as China and South Korea in favor of shipping cattle and beef to the U.S.

Another log fueling the fire of concern over missed opportunities is the relative value of Canadian beef exports to the U.S. as compared to other destinations.

“Another implication of our US-dominated export strategy is that we could be forgoing more profitable opportunities elsewhere,” the report said. “For example, Canada’s exports to countries such as Mexico, Japan and Hong Kong (Canada’s next most important export markets) reveals a higher per kilo value of beef than our US trade.”

According to data compiled by CAPI and presented in the report, Canada’s beef exports value to the U.S. average C$3.33/kilo (approx. $1.55/pound). This is well below the average export value of its beef to the aforementioned other nations: C$3.96/kilo (approx. $1.84/pound), C$5.08/ kilo (approx. $2.35/pound), and C$4.67/kilo (approx. $2.16/pound), respectively.

“There is an emerging view that we can’t optimize the domestic, American and other foreign markets at the rate we are shipping cattle and beef to the US,” said CAPI President and CEO David McInnes in the group’s official announcement regarding the report.

Despite Canada’s current dependence on the U.S. as a market for its cattle and beef, U.S. reliance on Canada is not nearly so strong.

Canada went from supplying 67 percent (1.69 million head) of America’s cattle imports in 2002 down to 33 percent (686,000 head) in 2011. As an export market for U.S. beef, Canada has grown in market share— from 8 percent by volume and 9 percent by value in 2002 to 15 percent by volume and 19 percent by value in 2011—but the U.S. still finds itself far less dependent on Canada than the other way around.

This situation, according to the CAPI report, is evidence of Canada’s slipping competitiveness in the global and its own domestic beef market. The report suggests some of the implications of the off-balance trade arrangement between Canada and the U.S. stems from what is being traded.

“Canada exports a greater share of trim and grinding beef to the United States but imports a greater share of muscle cuts. On the one hand, this suggests that we are missing a bigger economic opportunity to better serve our own domestic market. …On the other hand, the marketplace is ‘speaking.’” Another issue addressed regarding trade weaknesses uncovered in the current Canadian system is a lack of grade equivalence to U.S. grading systems, meaning that non-grinding cuts exported to the U.S. receive a lower cutout value.

Complications

The report cites several facets of the Canadian beef industry which have contributed to the current situation and would easily be liabilities to changing it. Among these challenges, the report highlights a shrinking cow herd and what it calls “the cowboy mentality.”

The report draws attention to the state of the Canadian cowherd. Much like the U.S., Canada’s beef cow herd has been in decline for some years. Since 2005, the Canadian cowherd has lost 1 million head, or about 20 percent. Though the report claims the current herd size is of a sufficient critical mass for current needs, it may be insufficient for expanded trade both at home and internationally.

The aforementioned cowboy mentality—namely a culture of business independence—boils down to insufficient collaboration within the supply chain. The vast diversity on the production side of Canada’s beef industry, compared with the relative bottleneck of two packers accounting for more than 80 percent of inspected slaughter, is also brought up as a potential source of lacking collaboration.

A lack of innovation resulting from abundant natural resources and geographic traits is also brought up in the report. Other cultural elements, such as what the report calls Canada’s risk-adverse nature, also play a part in this lack of innovation and thereby slipping competitiveness.

On this latter point, however, the report makes a point of outlining a strength in Canadian innovation, namely the industry’s tracking abilities and food safety systems which it calls as good or better than any in the world. This is an area on which the Canadian beef industry can capitalize to “develop a competitive advantage over the US.”

“Information can create a strategic advantage or even a competitive advantage. This is not a farfetched proposition. A report prepared for the US Meat Export Federation raised the prospect; it noted, ‘Countries that have well-developed mandatory animal identification and traceability programs enjoy a comparative advantage.’” Canada is one such country with mandatory animal identification and traceability programs which is arguably better than the current U.S. model.

Ultimately, the report calls for a strategic plan of action to address the various issues the industry faces. A theme used throughout the report was that of the roadmap, where they are, where they want to be, and how to get there. CAPI stressed that the report’s purpose was to identify the first and the third element of its roadmap analogy—where they are now and how to get where they want to go—but that the “where to go” element was something industry stakeholders needed to decide.

“Our report suggests, and many industry stakeholders agree, that with a solid strategy, a commitment to work together, and the discipline to execute effectively—then Canada’s beef industry will once again rise to the occasion and deliver the benefits that producers, stakeholders and consumers in Canada and around the world desire,” said Mc- Innes. — Kerry Halladay, WLJ Editor

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