Red Meat Study e[1]

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Toma & Bouma Management Consultantsand George Morris Centre, June 2006

North American Red MeatMarket Assessment


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What does the future hold for Canadas

red meat industry?The purchasingpower ofthemiddleclass inChinaand India is growing.With 1.3 billion people inChina and another 1.1 billion in India, evena tinyhike indisposable incomehassignificantimplications forexportingnations. Themiddleclass in these countries is predictedto reach 750million by 2020andAsian consumersarehungryfor products produced in theNorthAmericanmarket. To capitalize on this opportunity,somelarge organizations in theredmeat business arealready settingup joint ventures andsmall-scaleoperations inAsia.

In2006, 14.8million cattleandcalveswere raisedonclose to86,000farms and ranches across thecountry.With$6.5 billion in farm cash receipts,this sectorcontributesmore than anyother to theagriculture economy.Canadianproducersexported679,000metric tonnesof cattleandbeefto countriessuch as theUnitedStates,Mexico, andHongKong for a total value of$2.5billion, stillunder the $4billionmark set in20021.

In the sameyear some6,040 hog and pig farmsacrossCanadageneratedabout $4billion in farm

cash receipts.Canadas hogproduction was30.9millionwith exportmarkets accounting for over

55per centofsales. Some8,777,060markethogs

were exported.With 1,037,266metric tons2

exported toover 100 countries,hogs are amajorfood export. Pork product exports were valuedatapproximately $2.5 billion in 20063.

In 2005,FarmCreditCanadacommissionedaNorthAmerica RedMeatMarketAssessment.Released in June2006byToma &BoumaManagement Consultants inpartnershipwith theGeorgeMorrisCentre, some of the informationcontained in the study isdated as the industryhasevolved.However,many of thefindings areasrelevant today as theywerewhentheywere first

written.Forvalue-added knowledgethatoffers currentinformationandnewinsights,checkoutFCCsKnowledgePorkFacts and BeefFacts andKnowledgeGlobalizationat www.fcc-fac.ca.

FCCharnesses thepower ofknowledge tohelpguidesuccessful decision-making andadvancethebusinessof agriculture. If youre thirsty forinformation that will help youbuild a boomingoperation, give us a call.Ourrelationshipmanagers andsubjectmatter experts from coastto coastmake it easy for you todiscoverwhere you

stand.

KnowledgeInsights from FCC

Disclaimer

This study is for educational and general reference purposes only. The authors attempted to provide accurate and useful informationand analysis. However, FCC/AgriSuccess cannot and does not guarantee the accuracy of the information contained in this study.FCC/AgriSuccess assume no responsibility for any actions or decisions taken by any reader of this report based on the informationprovided. It is not intended to be used as a substitute for specific professional advice.

1 Source: Statistics Canada, Canfax2 1 metric ton = 1,000 kilograms/2,200 pounds3

Sources: Statistics Canada and Canada Pork Council


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North American Red Meat Market Assessment | 1

Cattle and beef overview

The Canadian cattle and beef packing industryis one of the most dynamic and growth-oriented sectors in Canadian agriculture. Itsgrowth over the last 20 years rivals that of anyagri-food sector. The industry has steadilyevolved into an integral part of the entireNorth American cattle and beef complex, fromcow-calf through feeding through packing. It ishighly concentrated at the feeding and packinglevel, however remains segmented andfractured at the cow-calf level.

Like farm operations in other production

sectors, the number of beef operations hasdeclined over the years. However, the uniquefeature of this industry, in comparison to othersectors, is the geographic dominance of thewest.Alberta, alone, is home to over two-thirdsof the beef feeding and packing industry.

The main competitors to the Canadian industryin domestic and export markets are the U.S.and the oceanic countries and South America.As indicated by Canadas export and importperformance, it is apparent that the Canadianbeef and cattle sectors are among the most

competitive in the world.

Hog and pork overview

The Canadian hog and pork sector is moregeographically dispersed across the countrythan the cattle industry. At the same time, it issubject to the same forces of rationalizationfacing the cattle industry. There has been asignificant decline in the number of hogoperations of all types in all provinces. Theonly exception to that trend is the increase infinishing operations in Quebec. In general,

Quebecs rate of decline of all types ofoperations has been significantly less than theCanadian average and the other three provincesof interest. The only exception is a larger thanaverage decline in farrowing operations. Therehas been a material increase in the average sizeof all operations between 1996 and 2005 withmany types more than doubling in size.

Quebec has had the slowest growth in average

size of operations by a large margin.

The last 15 years have seen major changes inCanada s production systems. During the early1990s, the industries were relatively small,ranging from 200 to 300 head, farrow-to-finish operations. Larger operations would havebeen defined as those with a thousand or moresows, and there would have been very few ofthose. In addition, Hutterite colonies were asignificant part of the provincial productionenvironment on the Prairies.

Today, the traditional farrow-to-finish operationis relatively important to the share ofproduction in Ontario where up to half of thepigs are produced by this type of operation.This is a much smaller percentage than 15years ago, and the remaining family and land-based operations are stable and competitive.More and more of Ontarios producers are partof larger production systems. They either ownsows as part of a system that includes genetics,feed, veterinary, marketing, or they are involvedin finishing. It is difficult to determineconclusively how many production systems are

in Ontario and how large they are in terms ofsow numbers. The Progressive Pork Producers(PPP) Cooperative has up to 160 memberswho market hogs to their own Conestoga


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2 | North American Red Meat Market Assessment

Meats plant.When PPP is included as a

production system, informed industry sourcessuggest that production systems may compriseup to 60 per cent of the sows in the province.Within this segment, the 10 largest productionsystems would encompass well over 40 per centof the sows in the province. The top fivesystems would have control over about one-third of the sows. The degree of control held bylarger entities has continued to grow in Ontario.

In Manitoba it is estimated that the traditionalindependent farrow-to-finish operatorrepresents about 10 per cent of the sows. The

remaining 90 per cent, including the Hutteritecolonies, is mostly very large hog productionsystems. In fact, the top three systems, Elite,Hytek and Puratone, control about 40 per centof the sows in the province. Elite is estimated tohave about 80,000 head in the provincefollowed by 40,000 for Hytek and 27,000 forPuratone. The inclusion of the Hutteritecolonies with the top three will account formore than 70 per cent of the sows. Alberta hasevolved toward larger units, three siteproduction systems and integrated or contractedrelationships. At the same time this evolution

was occurring, Albertas sow base has grownvery little. The sector is becoming increasinglyconcentrated without experiencing growth.Regardless of the reason for the lack of growth,larger production systems with 10,000 or moresows have not taken root to the same degree asthey have in Manitoba and Saskatchewan.

Markets and marketing

The red meat and livestock markets in Canadaare primarily characterized by open markets andadherence to the general laws of supply and

demand.With regard to price discovery andprice determination in Canada, the first point tonote is that from the farm through to the retailmeat counter, Canadian prices are determinedby U.S. prices due to the ability to arbitrage inan open North American market. Secondly, theexchange rate plays a direct role in commoditypricing in Canada. There is a highly-correlated

inverse relationship between the exchange rate

and cattle or beef prices.

Without question, the most important point tonote is the overwhelming significance of exportmarkets. Both the beef and pork industriesexport over half of the total product.Whilethese industries have often successfully soughtnon-U.S. export markets, they are very muchNorth American based.With that noted, thegrowth and development of the Canadian redmeat industry is tied to the fortunes andprospects for export markets, whether in theU.S. or abroad.

The domestic markets for pork industry havebeen characterized by the stability ofconsumption and demand, beef demand andconsumption has declined precipitously over thelast 20 years, the industry has enjoyed stabilitysince 2000.

Consumer markets for red meat

Generally speaking, on a per capita basis thedemand for beef has declined over the past 30years. However, it has stabilized and evenincreased somewhat over the past five years.

During the BSE crisis, Canadian beefconsumption actually increased. Pork demandhas remained fairly constant for the past 10years.

Most of the growth in the Canadian beef andpork industries can be attributed to the growthof exports. In 2002, Canada was the worldsfourth largest exporter of beef, with more than75 per cent going to the U.S. Over 50 per centof total Canadian pork production is exported,with one-half of that volume destined for theU.S. Japan is Canadas next largest customer. In

2004, Canada was the worlds largest porkexporter and has just been surpassed by the U.S.

The nature of consumer demand for red meatsis undergoing change. Recent trends inconsumer purchasing illustrate that thefollowing attributes are increasingly important:(1) the growth of brands, (2) meat with a story,


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particularly beef, (3) nutritional information inthe form of detailed labels, (4) the growth ofspecialty products, (5) a focus on convenient oreasy-to-serve products and (6) the increasedsophistication of retail markets where suppliersare increasingly delivering case-ready productsready for sale.

Overall there is a growing interest in qualitativevariables such as where and who has raised andprocessed the product.And there are increaseddemands for natural, organic and uniqueproducts.

Processors in the red meat market fall into oneof two categories:

the large-scale mega-plant that competes onthe basis of volume, low cost and the abilityto sort and market products according toquality and a wide range of large-scale retail,institutional and food service buyers

the specialty niche or regional plant thatcompetes on the basis of supplying a uniquedifference that is not easily copied

The vast majority of the red meat marketcontinues to be supplied by mega-plants.Thespecialty niche plant is more likely found withinthe beef sector, where numerous small-scaleoperations marketing branded products with astory have emerged.This phenomenon is lesscommon in the pork sector where processors

already have considerable branded product

experience and the attributes of farmer-raisedmeat holds a lower profile. Significantly, beefmega-plants are rapidly introducing brandsincluding natural and organic products, whichwill impact the competitiveness of the smallerplayers.

Potential for competitiveness and expansion

in North America

The Canadian red meat industry has enjoyedconsiderable growth over the past 20 years.However, the industry is losing competitive

position in relation to the U.S. for severalreasons:

declining competitiveness of Canadian feedgrains such as barley versus U.S. corn.Consequently, the cost of feeding animals inCanada is higher

the dramatic increase in the value of theCanadian dollar over a short period of timeincluding the last four years versus a 25-yearperiod of decline

growing concerns with price discovery andthe widening basis between U.S. prices and

Canadian prices the relatively few beef and pork processors in

Canada, making for a less robust market forlive animals

Overall, Canada is maintaining itscompetitiveness as a supplier of beef calves andfeeder pigs. Large numbers of both these classesof livestock are being exported to the U.S. forfinishing and processing.

Over the past 20 years, the U.S. pork industryhas experienced a dramatic restructuring. Thechange has been led by the emergence, andnow dominance, of large-scale integrated porkproduction systems. The changes havetransformed the U.S. into one of the mostcompetitive pork industries in the world. Thefact that U.S. pork exports have increased for 15consecutive years is an affirmation of thiscompetitive position.


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Restructuring has also occurred in the Canadian

hog industry, however, not to the same degreeand level of integration as in the U.S. Maple LeafFoods has an interest in more than 122,000sows, however is currently seeking to reducethese numbers due to poor financialperformance. On the other hand, a consortiumcomprising Big Sky Farms, Hytek and Olymel isin the final planning stages to construct a newpork processing plant in Winnipeg.

The structure between the U.S. and Canadianbeef markets is more similar, albeit the U.S. has amore competitive packing sector. The Canadian

system has developed a more consistent geneticbase in the cow herd, a result of cross-breedingprograms and selection pressures that arguablyhave been more rigorous than those in the U.S.Further, there is a climatic factor. Canadian beefbreeds are typically northern cold climate breedswhereas much of the southern U.S. cow herdincluding Texas, Oklahoma,Arkansas and muchof Kansas, has a Brahman influence to withstandthe summer heat.

The U.S. processing sector operates morecompetitively than Canadas. They have access to

a larger low-cost labour pool, predominatelyMexican migrant workers. Particularly in thecase of the pork processing sector, they haveaccess to large numbers of livestock enablingdouble-shifting. There are large scale retail, foodservice and institutional buyers.

With respect to expansion, new growth willoccur in two areas:

Export markets, most likely Pacific Rimcountries. Competition for these markets isfierce and coming from several low costcompetitors such as Australia, Brazil,

Argentina, U.S. Emerging quality markets including natural,

organic or other qualitative attributes such asorigin, region or animal welfare friendly. Thisrepresents more of a shift in demand than agrowth in demand.

Clinically speaking, the most advantageous

location for expansion in the beef industry isWestern Canada due to the presence of the largecow-calf herd located in Saskatchewan andAlberta, the supplies of feed grains and afavourable climate characterized by lowhumidity and generally dry conditions tofinish cattle.

Western Canada is also favourably suited forexpansion of the hog industry for similarreasons. However, the ultimate location forexpansion is also heavily influenced by theinherent efficiencies that can be achieved by

integration or co-ordination. A critical mass ofproduction units in combination with a majorprocessor with access to feed grains located inany region of the country with access to feedgrains can operate very competitively. This hasbeen demonstrated by such states as NorthCarolina and Oklahoma, where neither state hasa feed grain base.

Perhaps the most critical determinant for theultimate location of new livestock productionand processing facilities will be theenvironmental factor. Clearly, areas of high

population such as lower Quebec or southernOntario will continue to experience moreresistance to livestock industry expansion.Western Canada is also experiencing similarresistance, however, relative to the agriculturalland base and human populations, livestockdensities are small.The likelihood of successfullyexpanding the livestock industry is much higherin the Prairie provinces.

The capacity for growth and the conditionsenabling production will not drive theexpansion of the livestock industry. New growthwill only be fuelled by new markets andincreased consumer demand. This will not beeasy to come by. In fact, the Canadian red meatindustry is struggling to utilize the availableprocessing capacity and remain competitive inits markets. This is true of the beef industry andespecially true of the hog processing sectorwhere no plant has yet achieved a double shift.


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Implications

Since the BSE crisis, there has been considerablediscussion within the beef industry regardingthe need to expand capacity in the processingsector. Most of this pressure comes from theneed to slaughter cows, since over-30-monthanimals as well as meat products cannot beexported.

However, since 2003, packer capacity hasincreased substantially and is now in the orderof 97,000 head per week, up from a previouslevel of 70,000 head per week.This representsan increase of 27 per cent. Slaughter levels in

2006 averaged around 60,000 to 65,000 headper week and have exceeded 70,000 head onlyonce.Thus, the calls for more capacity withoutfurther qualification must be consideredcarefully.

Figure 1 identifies some of the key attributesand critical success factors associated with themega-plant and the specialty or niche plant.Thisis presented in the following chart.

Concluding Remarks

Overall, it is difficult to conclude that there is animmediate or significant opportunity for theintroduction of any new mega-plants in Canada.In our view, there are two key reasons:

lack of sufficient livestock supplies such aspork and beef, to provide the necessaryvolumes

current overcapacity within the existingprocessing sector

Furthermore, there are no immediate under-supplied markets, domestic or export, thatrepresent a quantum leap in demand to warrant

new large-scale capacity. Nor can it be arguedthat current capacity is old technology. Both IBP

and Cargill are modern plants as are the plants

operating within the hog industry.

The opportunities that offer some potential arespecialty or niche processing plants withtargeted marketed strategies such as natural ororganic or some other regional or breedemphasis.This is most likely to occur in themarketing of beef. However, this strategy hastwo major risks:

a lack of marketing savvy, brand managementand consumer marketing. The importance ofthis experience cannot be overstated and it isoften lacking on the part of proponents.

rapidly-developing branded programs on thepart of the mega-processor.

1 Weekly Livestock Market Review 2006


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Plant size Plants need to be comparable insize to the major plants in theU.S. (beef 5,000 head or moreper day, pork 15,000 head ormore per day).

Small-scale operations will vary insize depending upon marketposition and strategy.

Management Mass production managementstyle. Ability to manage largework force, deal with high levelsof turnover and procure largedaily volumes of livestock,

emphasis on efficiency and lowcost, overall a high pressure,intense working environment.

Small-scale operations will vary insize depending upon marketposition and strategy.

Labour

requirements

Requires ready access to largelabour pool, expect highturnover each year, can be ashigh as 100 per cent.

Small but skilled workforce whoare committed to creating value.

Livestock

supplies

Ready access to large supply oflivestock, pork plants will likelyhave a high proportion of owned

or contracted production, beefplants will require 15 per cent to30 per cent of owned cattle andthe presence of buyers able tocontract with area feedlots.

Requires a distinct and managedsupply chain with definedproduction protocols. The supply

chain should be firmly establishedwith a very clear expectation ofthe number of animals that willbe delivered in set time frames.

Customer

base

Large food retail, food serviceand institutional buyers.

Very defined customer base withdistinct requirements and built onstrong interpersonal relationships.

Other

characteristics

Emphasis on high volume andlow cost.

Emphasis on value creation andbrand management.

Major

competitive

threat

Loss of a major customer to acompetitor. Competitors able tooperate with a lower coststructure due to new efficienciesor better procurement programs.

Inability to maintain branddifferentiation. Competitor who isable to deliver new attributes ordeliver similar product at a lowerprice.

Comments Overall a low margin business. Higher margin business built onmeeting customer expectations.

Attribute Mega-Plant Specialty/Niche Plant

Figure 1: Key attributes and critical success factors associated with processing plants


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These will provide considerable competitionunless buyers are extremely discerning or loyalto the niche processor.

Niche processing within the pork industry isless likely to occur since pork quality across theindustry is already highly consistent. Inaddition, the marketing of branded products isalready well-established in the pork processingindustry.

Finally, there are a number of specific challengesthat face the Canadian livestock production andprocessing industry. These include:

feed grain competitiveness and the ability ofthe Canadian feed grains to compete with U.S.

corn price discovery and the competitiveness of

Canadian buyers versus their U.S. counterparts

currency and exchange risks and the impacton prices paid for Canadian livestock andmeat products

trade and animal disease risks and the

potential loss of market access environmental risks and the increasing

difficulties associated with locatingproduction and processing operations

Perhaps the most important question to askwhen considering expansion in these sectors iswhether the proposed investment is market-driven or supply-driven? If the response is thelatter, then extreme caution on the part of theinvestor is advised. If the response is the former,a careful and detailed assessment of the marketopportunity is imperative.


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Phone:1-888-332-3301E-mail: [email protected]

www.fcc-fac.ca

Prepared by:

Disclaimer

This study is for educational and general reference purposes only. The information contained in thisreport is solely the opinion of the research partners. FCC and its research partners assume noresponsibility for any actions or decisions taken by any reader of this report based on theinformation provided. It is not intended to be used as a substitute for specific professional advice.

North American Red MeatMarket Assessment

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