How cattle and hogs get priced in Canada

Ask a Manitoba hog farmer what pigs are worth this week and the answer will probably start with a number from the United States. Ask an Alberta feedlot manager the same about fed steers and the conversation will turn quickly to Chicago futures and the exchange rate. Canada raises cattle and hogs on its own land, with its own feed and its own packers, but the price of both animals is built around American reference prices, then adjusted for the dollar, local supply and the quality of each animal.

This piece follows the money through both markets: where the reference price comes from, how it is turned into a Canadian price, and what changes the cheque an individual producer receives. It closes with a worked conversion using round, illustrative numbers. Nothing here is trading advice.

Why the reference prices are American

The North American livestock and meat markets are closely tied. Live animals, boxed beef and pork cuts move across the border in both directions, and Canadian packers compete with US meat in Canada and in export markets. A study prepared for the Canadian Pork Council in 2019 estimated that about 18 per cent of the pigs produced in Canada were exported live to the United States, that 23 per cent of the pork eaten in Canada came from the US, and that 19 per cent of Canadian pork production was exported there.

The other reason is information. The United States requires large packers to report what they pay for cattle and hogs under its Livestock Mandatory Price Reporting Act, and the US Department of Agriculture publishes those prices. Chicago futures contracts for live cattle, feeder cattle and lean hogs trade every business day. Canada has nothing comparable in volume. Canadian prices are therefore usually expressed as a US price plus or minus a local difference.

Part 1: fed cattle

Fed cattle are steers and heifers that have been finished on grain in a feedlot and are ready for slaughter, usually at roughly 600 to 700 kilograms (about 1,300 to 1,550 lb) live weight. Most Canadian fed cattle are finished in Alberta, with smaller numbers in Saskatchewan, Ontario and elsewhere.

Cash trade

In a cash trade, a packer buyer and a feedlot agree a price for a pen of cattle for delivery within a week or two. The price is either per hundredweight of live weight, or per hundredweight of carcass weight "on the rail", where the animal is paid for after slaughter based on its dressed carcass. Rail sales are usually priced on a grid that adds premiums for higher quality grades such as Canada AAA and Prime and for good lean yield, and takes discounts for carcasses that are too heavy, too light or over-fat.

Formula and contract pricing

Much of the fed cattle supply never trades on the open cash market. Feedlots and packers agree contracts in advance, often priced by formula: the cash price reported for a given week, a futures price plus an agreed basis, or the value of the boxed beef the carcass produces. The 2019 Canadian Pork Council study, which also looked at the beef sector, reported an estimate that 20 per cent or less of western Canadian fed cattle were sold on a cash basis, and in some weeks less than 5 per cent. It noted that two packers dominate the western market and that formula contracts carry lower transaction costs.

That creates a familiar problem. Formula prices often depend on the cash price, but if few cattle trade for cash, the reported cash price rests on a thin sample. Every producer selling on a formula is relying on the few who still negotiate.

Canfax and price reporting

In Canada, cattle price reporting is voluntary. Canfax, the market information division of the Canadian Cattle Association, collects and publishes weekly fed and feeder cattle prices and cash-to-futures basis levels, and it also reports the mandatory US prices. Its detailed reports are sold by subscription, and summaries appear weekly in farm newspapers. Because reporting is voluntary, Canfax depends on feedlots and buyers sharing settled prices.

Part 2: the basis

The basis ties the Canadian fed cattle price to the Chicago live cattle futures price. It is calculated as:

Canadian cash price (C$ per cwt) minus the nearby live cattle futures price converted into Canadian dollars.

Basis is usually negative for Alberta fed cattle. Part of the gap is the cost of shipping cattle or beef to US markets, and part is the balance of supply and demand at home. It narrows when Canadian packers are short of cattle and widens when cattle back up in feedlots. Basis also follows seasonal patterns, which is why feedlots track it as closely as the futures price. A feedlot that sells futures to lock in a price still carries basis risk, because the local price can move independently of Chicago.

Part 3: feeder cattle at auction

Earlier in the chain, calves weaned from cow-calf ranches and heavier feeder cattle bound for feedlots are sold mostly through auction marts across the Prairies, Ontario and British Columbia. Autumn is the busy season. In October and November, many western auction marts run weekly calf sales as ranchers ship the year's calves.

Auction prices are quoted per hundredweight live, by sex and weight class, such as steers of 500 to 600 lb. Lighter calves bring more per hundredweight than heavier feeders, because a buyer pays for the weight gain still to come. Buyers bid with an eye on the Chicago feeder cattle futures, the exchange rate, the expected price of fed cattle when these animals finish, and the price of barley and corn that will feed them in between. Some sales run online or by video, with cattle sold from the ranch for later delivery, and some calves are sold privately by contract.

Part 4: hogs

Hogs are priced quite differently. There is almost no auction market for market hogs, and very little cash trade. Most hogs are either owned by the packer or a packer-linked company from birth, or sold under contract at a price set by formula.

According to the 2019 study for the Canadian Pork Council, the arrangements vary by province:

• Quebec: hog prices have been governed since the early 1980s by the producers' collective marketing plan. Producers negotiate a sales agreement with slaughterhouses as a group, usually for four years, and that agreement sets the price formula. At the time of the study, the formula was moving from US live hog prices toward the US wholesale pork cutout, with a ceiling and a floor.
• Ontario: fewer than 2 per cent of hogs were negotiated on the cash market. About 30 per cent went to a producer-owned packer, and most of the rest went through contracts. Packers had to report what they paid for Ontario hogs, and a reference price based on a US hog index was published for use in contracts.
• Western Canada: most pigs were either owned by the packer or sold on formula contracts tied to a US reference price, with virtually none sold on a spot basis. In Manitoba, prices collected from the major processors are compiled and released weekly by the province.

From US reference to Canadian dollars

US hog reference prices are usually quoted in US dollars per hundredweight of carcass weight. Canadian hog prices are quoted in dollars per 100 kilograms of carcass weight. Turning one into the other takes two steps: multiply by the exchange rate, then multiply by 2.2046, the number of hundredweights in 100 kilograms. If the US reference is a live-weight price, a dressing percentage is also applied to convert it to a carcass basis.

Grids and indexes

The formula sets a base price. Each producer is then paid on the individual carcass. Packers grade every carcass for weight and lean yield and apply an index from their grid. A carcass in the ideal weight and lean range earns an index above 100, a premium on the base price. One that is too light, too heavy or too fat earns an index below 100. Some contracts also pay premiums for particular programs, for example hogs raised without certain feed additives, which can matter for export access, as the case of ractopamine and the pork trade shows.

How the two systems compare

A worked example: two conversions

The prices, exchange rate and adjustments below are round illustrative figures. They are not market quotes.

A pen of fed steers

Say the nearby live cattle futures price is US$185.00 per cwt and the exchange rate is C$1.36 per US dollar.

1. Convert the futures price: 185.00 x 1.36 = C$251.60 per cwt.
2. Apply a basis of minus C$10.00: 251.60 minus 10.00 = C$241.60 per cwt live.
3. Price one steer weighing 1,450 lb (about 658 kilograms): 14.5 cwt x 241.60 = about C$3,503.

If the Canadian dollar weakens to C$1.40 with nothing else changed, the same futures price converts to C$259.00 per cwt, the cash price after basis is C$249.00, and the steer is worth about C$3,611. That is roughly C$107 more per head, without any change in Chicago.

A market hog

Say the US reference price is US$90.00 per cwt carcass, the exchange rate is again C$1.36, and the contract pays 100 per cent of the converted reference.

1. Convert currency: 90.00 x 1.36 = C$122.40 per cwt carcass.
2. Convert units: 122.40 x 2.2046 = about C$269.85 per 100 kilograms carcass.
3. Apply the carcass: a 110 kilogram carcass with an illustrative grid index of 108 earns 269.85 x 1.10 x 1.08 = about C$320.58.

A carcass of the same weight graded at index 95 would earn about C$282, which is about C$39 less for the same reference price and exchange rate. Over thousands of hogs a year, the grid is often where a farm's skill shows up in its income.

A calf and a feeder

The worked logic also explains feeder prices. Suppose a 550 lb steer calf sells for C$350 per cwt, about C$1,925, and an 850 lb feeder sells for C$300 per cwt, about C$2,550. The heavier animal brings less per pound but more per head. The C$625 difference for 300 lb of gain works out to about C$2.08 per pound of gain. A backgrounder deciding whether to keep calves over winter compares that value of gain with the cost of the feed, yardage and risk needed to put it on.

What this means for producers

A Canadian livestock price is built from parts: a US reference, the exchange rate, a local basis or contract term, and a grade or index on the individual animal. Each part can move on its own. When producers say the price is set in Chicago, they are half right. The reference is, but the basis, the dollar and the grid are Canadian, and together they often decide whether a year pays. The wholesale side of the beef story is in boxed beef explained, and more on livestock trade is on the trade and markets issue page.