Demand drives the outlook for Canada’s red meat sectors for 2018

FCC Ag Economics is doing a mid-year check-in on our January 2018 Outlooks. Throughout July, we’ll update our expectations about profitability in six Canadian ag sectors (crops East and West, hogs, cattle, dairy and food processing). We’ll describe what’s happened in 2018-to-date and what we think you should monitor in the next six months.

The Canadian hog sector was generally profitable in the first half of 2018, as we forecasted in January. It was a mixed bag though: rising feed prices led to tight margins on finishing operations, while farrow-to-finish operations recorded profits close to $20 per head on average. Those margins will be tested throughout the rest of 2018, largely because of trade tensions and growing pork supply in the U.S.

Our forecast for the cattle sector has also held so far in 2018. Cow-calf operations have been profitable all year, a trend that’s likely to continue into 2019. Backgrounders and feedlots recorded negative margins in the first six months, with little relief in sight. Live cattle futures show a small increase between now and December, while feeder cattle futures look to hold steady.

The US$0.78 loonie helped boost Canadian revenues in both sectors during the first six months, offsetting increases to interest rates, and other farm input costs such as fuel and feed.


With hog inventories at January 1, 2018 up 2.7% year-over-year (YoY), and seasonal highs still expected to come, Canadian hog production continues to grow in 2018. As of June, hog slaughter in Canada was down 1% YoY, but it’s expected to pick-up in the second half of 2018 with expanded processing capacity.    

Canadian exports of feeder hogs to the U.S. declined 6.4% and slaughter hogs declined 9.6% YoY as of June 1. Increased U.S. hog production and slower-than-expected growth in slaughter expansion there helped produce the slowdown. The U.S. is likely to see a further expansion in hog supply between June and December, bringing hog prices in the second half of 2018 down from the current level.  

Canada’s pork exports to the U.S. also declined YoY between January and May 2018. While Canadian exports picked up a healthy 19% YoY growth to Mexico, and they’re growing in Japan, South Korea, Taiwan and the Philippines, an expected gain in exports to China failed to materialize in the first six months, perhaps because the Chinese hog herd’s continued growth has led to weaker import demand. Over the next six months, China’s production growth is expected to slow as Chinese hog profits face challenges.

Costs should stabilize throughout the remainder of 2018. Feed costs rose more than expected in the first half of the year, but with plenty of corn coming to market, feed barley should settle slightly over CA$5.00 per bushel. Any variation in Canadian profits in the hog sector will therefore most likely come from hog prices. Escalating trade tensions between the U.S and Mexico, and the U.S. and China and the resulting tariffs on U.S. pork exports may disrupt markets. Around 40% of U.S. exports typically wind up in those two countries. Fewer trade opportunities for U.S pork may open the door for more Canadian pork exports, but also result in reductions in the hog price that Canadians receive.


As of January, the Canadian herd hadn’t seen any serious expansion. 2017 prices for fed heifers had continued to encourage processing over retention. There were 562,000 heifers for beef replacement on-farm, a small YoY decrease to start 2018.

At the end of June, Canadian slaughter at federally inspected plants was boosted 4.2% YoY. Fed steer (Alberta) prices exceeded same-month 2017 levels early this year but they’re not likely to maintain that pace throughout the rest of the year, as more cattle come to market. A decline in Canadian live animal exports to the U.S. so far in 2018 has also helped to boost Canadian beef production. That’s likely going to increase further by December, which would surpass the 0.2% increase for 2018 production cited in our January Outlook .

Beef demand continues to be strong, both domestically and globally.

Feed costs shouldn’t rise in the next six months, if expected increases to both Canadian and U.S. corn production occur. U.S./China trade tensions may indirectly influence profitability, via lower feed prices, as will dry weather conditions across prairie pastures and U.S. plains. 

With more pork possibly hitting Canadian retailers in the next six months, beef prices may be put to the test. Stocks of all frozen and chilled meats in cold storage were up 22.3% YoY in April. Frozen beef stocks increased 12.6% and pork stocks rose 13.8% in the first four months of 2018.

The good news is that demand continues to be strong, both domestically and globally. Canadian beef prices have come down 0.6% YoY in May. That trend may last until December and this is good news for the cattle sector. Global markets continue to buy Canadian beef: beef exports increased 86% in the last five years, with the U.S. leading the growth. Japan, Mexico and China have also stepped up their imports of Canadian beef.

Interest rates slowly trend up while the loonie hovers at US$0.78

Global market forces played a big part in Canadian competitiveness and the profitability of our agricultural sectors in 2018-to-date. Several macro factors did too – and while we didn’t get everything right, our forecasts in January help explain those trends.

Our January forecast of a US$0.78 loonie was right on the money up to mid-June (see illustration). But the Canadian economy relies on the strength of export sectors. Trade tensions, currently pushing the CAD lower, could continue to pressure the loonie below the $0.78 projected 2018 average.

In January, FCC Ag Economics forecasted 2018…

Sources: Bank of Canada, Bloomberg

However, we underestimated the strength of the world economy and the resulting robustness in global oil demand: despite rising oil production in the U.S., the West Texas Intermediate (WTI) crude oil price averaged close to US$65, significantly more than our initial projection of US$55.

The Bank of Canada has revised their projections of Canadian economic growth for 2018 since our January outlook. The Bank expects a slower rate of growth, but that the economy will operate close to full capacity this year. Inflationary pressures persist, trending modestly higher than our forecast of 2.0%, the Bank’s mid-point target.

We also correctly anticipated the higher short-term rates in the U.S. and Canada that pushed bond yields higher. The average 5-year fixed rate on mortgages has climbed 35 basis points in the first six months of 2018 – in line with our forecast of an annual increase of around 75 basis points.

After hikes to the overnight rate in January and July (of 25 bps each), financial markets suggest one more increase is possible before the end of 2018. We believe however that the uncertain global trade and economic landscapes could make it difficult for the BoC to proceed with an additional rate hike.

On the radar

  • The loonie’s waning capacity to gain value in the last six months of the year. A lower loonie can help offset downward pressure on commodity prices. That may be especially timely this year, as the US trade conflicts bring uncertainty and lower prices.
  • An uncertain global trade environment to close out 2018
    • North American Free Trade Agreement (NAFTA) discussions will continue (with no determined end date)
    • Full ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) agreement is ongoing. 
    • The full implementation of the Comprehensive Economic and Trade Agreement (CETA) is conditional on ratification by the EU member states.
  • 2018 yields for U.S. corn and Canadian barley and corn.

Martha Roberts
Economic Research Specialist

Martha is a Research Specialist with a focus on economic performance and success factors for agricultural producers and agri-businesses. Martha has 20 years’ experience conducting and communicating quantitative and qualitative research results to a number of different audiences. She holds a Master of Sociology degree from Queen’s University in Kingston, Ontario.


In this series