All Things Considered: February 2009

I suspect this is the year when poultry envy will come roaring out of the closet.
It’s not that every Canadian, or even every Canadian livestock producer
wants to produce poultry. There are a lot of cattlemen, especially
ranchers, who would rather do anything but spend days in a barn.

Our System Works

I suspect this is the year when poultry envy will come roaring out of the closet.

It’s not that every Canadian, or even every Canadian livestock producer wants to produce poultry. There are a lot of cattlemen, especially ranchers, who would rather do anything but spend days in a barn.

But I believe poultry will remain resolutely profitable in the coming year while everything else struggles.

The reasons for this are many and complicated, but can be boiled down to one simple fact: poultry has a system that works and others don’t.

Supply management may not be perfect, which can be seen in the periodic inter-provincial wars over quota, the wrangling over prices, the consolidation of production and the constant attacks by those economists who remain embedded in the 19th century, but this year it is the only place to be.

If you doubt that, look around. The worldwide economy is, at best, stalled. International trade has plummeted, stock markets have tanked, housing markets are falling, international banks are tottering, massive corporations are on life support and millions of jobs are either disappearing or at risk.

Here in Canada, the hog industry is on its knees and the cattle industry is struggling mightily. In both cases, those industries placed one-way bets that many economists and industry experts told them were sure things. They bet big on the U.S. market.

The U.S., they were told and they believed, was a sure thing. It was big, it was rich, it was close and it was open.

There is no question that it is big, that it is rich and that it is close. The problem is that an open U.S. market tends to be a fleeting thing. Over the years, U.S. hog and cattle producers have tried a variety of ways to close the door including tariffs of dubious legality, boycotts, border blockades and a few other methods. In every case they have found more than a few very powerful senators to support their efforts.

The latest of these is COOL (Country of Origin Labeling). The legality of this under international trade rules is questionable, but it is popular with consumers.

Consumers want to know where their food is coming from. Even I want to know where my food is coming from. I want to know if the apple juice is made from Chinese or Canadian apples. I want to know if the beef was raised in Canada. It’s hard to begrudge Americans the knowledge that I want.

What has happened is that U.S. meat packers have concluded that Americans are going to want meat that is certified American and have cut back or stopped importing animals or meat from Canada. When more than half of your production has been headed south that is a problem for Canadian producers.

There are three obvious options. The first is to try and break back into the U.S. market. While that may succeed it will take time and money. The second is to develop other international markets and, perhaps, replace U.S. beef and pork. Canadian producers and companies have tried that over the years and met with limited success. To succeed now, given the state of the world economy, would be a major accomplishment, but maybe this time will be different. The third option is to contract and wage a war for Canadian dinner plates.

As this is written, the livestock industry seems poised to pursue the first two options. It is a brave decision fraught with risk.

Eventually the bet may pay off, but how long can they afford to stay at the gambling table?

A safer bet would be to build the home base and once it is fully secure carefully and prudently expand into profitable overseas markets.

As to the U.S. it remains the most logical export destination, but it is also very politically sensitive and no matter what we think, we can’t cram Canadian meat down their throats.

s for the Canadian grain sector just about anything is possible. World grain supplies are up, especially for wheat, after last year’s huge crop and prices have dropped dramatically from spring peaks. However, they remain above levels of three years ago.

Also up are many production costs. While fuel has dropped, fertilizer prices remain high. Although it is early days, it is starting to look a bit like the cost-price squeeze of the late 1970s and early 1980s when grain prices fell but input costs didn’t and realized net farm incomes collapsed.

Given all of that, it looks, as I said earlier, to be a good year to be in poultry. Markets should be OK, returns should be OK and there seems to be only a slight risk that the WTO will get together on a deal that would sink supply management.

Given what 2009 could hold for everyone else, OK is great and the slight risk of a WTO deal isn’t all that much to fret about.