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Oil and beef: Expert says Alberta must diversify as major industries hit by COVID-19

Low oil prices likely to remain for 12-18 months due to oversupply: Alberta premier
WATCH ABOVE: Premier Jason Kenney says the Alberta government is predicting extremely low oil prices will remain in place for 12 to 18 months due to the global inventory oversupply amid the COVID-19 pandemic slowdown.

Alberta — long known as Canada’s central hub for both beef and oil —  has seen both those industries slammed with economic troubles since the COVID-19 crisis began.

On April 20, U.S. oil futures prices fell into negative territory for the first time in history, because storage tanks are nearly full and refineries are reducing output amid slow economic activity during the COVID-19 pandemic.

And on the same day, Cargill Inc.’s High River, Alta., meat-packing plant announced it would be temporarily shuttering operations, after a worker died from the coronavirus and hundreds of other employees tested positive. Later in the week, the JBS meat plant in Brooks, Alta. also announced it would be reducing production due to an outbreak.

READ MORE: Online petition calls for temporary shutdown of JBS meat plant in Brooks, Alberta

Together, those two meat plants account for 70 per cent of Canada’s beef processing capabilities. 

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“The Alberta economy is really based on resources and agriculture. So they’re clearly both being walloped by the energy prices plummeting and the shutdown of the plants like Cargill,” Moshe Lander, an economics professor at Concordia University in Montreal who also served as a senior advisor to the Government of Alberta in the Ed Stelmech era, said.

“It’s kind of the perfect storm of bad events.”

Lander said that while agriculture has its own cycle of ups and downs, similar to oil, the beef industry shutdowns due to COVID-19 has put that industry in a situation with no fast solution.

“In the current pandemic that we find ourselves, you’re also seeing a big demand response. So that’s why things look so much worse this time than they have in previous cycles.”

On Tuesday, McDonald’s Canada made the announcement that it would begin supplying beef from approved suppliers out of Canada.

“For Alberta farmers, or cattle farmers, the issue of course is how much were they reliant on McDonald’s for their source of demand for their product,” said Lander.

Coronavirus: What closures and restrictions on Canada’s 2 largest meat packing plants means for the cattle industry
Coronavirus: What closures and restrictions on Canada’s 2 largest meat packing plants means for the cattle industry

The Canadian Cattlemen’s Association says McDonalds relies heavily on Cargill for supply– and it wasn’t surprised by the announcement, despite Cargill announcing it will reopen May 4.

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“Unfortunately when you go through something like COVID-19, you go into a different environment where we’re just trying to work our way through it, and there’s something new every day,” said Dennis Laycraft, Executive Vice President of the Canadian Cattlemen’s Association.

“But you know, coming out of this, we know we have their (Mcdonald’s) full support moving forward.”

READ MORE: McDonald’s Canada to start importing beef over supply concerns amid COVID-19

One Alberta supermarket said that they haven’t seen any impacts on their supply so far, even though it estimates that about 90 per cent of the beef it sells comes from Cargill and JBS.

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“It’s not that we’re not getting anything,” Irene Caldwell, the meat manager at the Coaldale Food Market in Lethbridge said. “They’re limiting the amount of cases we’re getting, but we’re okay.”

She did add that the market has seen an increase in sales specifically when it comes to beef.

“I think people have a tendency to panic buy,” she said. “We have noticed a difference in sales for sure, but some of that too is people are off right now, and maybe not going into the city as much.”

Some Winnipeg retailers limiting beef sales
Some Winnipeg retailers limiting beef sales

Prime Minister Justin Trudeau said on Wednesday that the federal government is working to ensure there won’t be any shortages.

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“We’re working very closely with the agricultural industry to ensure that people get good, healthy food, particularly as we embark upon the summer where there will be a need and an ability to get lots of fresh vegetables and produce from across the country,” he said.

“We need to continue to stay vigilant because of the large disruptions across many different sectors in our in our country, including, obviously, agriculture.”

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Oil pricing situation won’t be improving soon

When you combine the beef situation with the oil price drop, Lander said that he believes this should be the wake-up call for the province.

“Alberta has always been on a boom and bust cycle,” he said. “We’ve been through it numerous times with the oil cycle. It happens all the time.”

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READ MORE: Economic ‘train wreck’ leaves Calgary-based Husky with $1.7B loss, prompts 90% dividend cut

Alberta-based energy companies Husky, Vermillion and Cenovus announced Wednesday a combined $4.8 billion dollars in losses.

Richard Masson, an executive fellow with the School of Public Policy at the University of Calgary said that it’s likely the current situation with oil won’t be ending soon.

Coronavirus outbreak: What negative oil prices mean
Coronavirus outbreak: What negative oil prices mean

“Even though OPEC has cut 10 million barrels a day production, it’s not enough and storage is filling up everywhere,” Masson said Wednesday.

“We’re going to have some really tough times, and really low prices, because we have no place to physically put the oil. And even when we get out of that, we’re still going to have challenges, because everything in inventory will be full.”

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READ MORE: What does the oil price drop mean for the average Canadian?

Premier Jason Kenney said Wednesday that he’s been told the oversupply problem could last 12-18 months.

“Our best intelligence is that those extremely depressed prices are likely to continue for the better part of the year, at least given global inventories,” he said.

However, Kenney said that he has hope the province will be able to bounce back following the crisis.

“Post-pandemic, we’re going to see a global demand and energy consumption increase. Eventually global economies will come back to something like normal, people will start to travel by air again, and we’ll see demand go back up.

“Our oil sands in particular are much more capital efficient than U.S. shale,” Kenney said. “The oil sands are long-lasting reservoirs and assets. Once you build them, you can produce for 20 or 30 years. We believe we’re going to survive through this and come out stronger at the end of it.”

Experts say it’s time to diversify, possibly add PST

Lander said that he believes this no-win situation could have been avoided if Alberta’s economy was more diversified.

“The biggest problem with provincial governments in Alberta, whether it’s going back decades… is an excessive reliance on oil and gas royalties as a source of revenue,” Lander said. “This is when the government needs to step forward and say, ‘Okay, this is not going to continue to work this way going forward.'”

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He suggests that the while Alberta’s long-time ties to oil could make the transition difficult to pitch at first, the government could work with individuals and companies to offer incentives and funding for retraining.

“What the government needs to do is provide that safety net,” he said, “If they take a leadership position and try to help start the psychology as much of the economics of that transition, there is hope.”

READ MORE: Alberta company diversifies oil field business amid challenging times for energy sector

He added that he believes this could also be the time for PST, a sentiment that has been echoed by other experts through the pandemic.

“The government is kind of locked in so deeply to that oil and gas sector, that it’s going to be very difficult to get themselves out,” Lander said. “We need to have a provincial sales tax —something that’s a little more immune to this boost and bust cycle. And that provides the government a bit more stability.”

READ MORE: Expert weighs in on Kenney’s economic plan for Alberta, suggests PST could be an answer

He said that he believes the current situation has created an environment where Albertans are more likely to accept the need for a PST.

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“People are willing to entertain the thought of a sales tax right now,” he said. “They recognize the trouble the province is in. Their mind is more open to it now than when things are riding high.”

Alberta energy companies losing billions in downturn
Alberta energy companies losing billions in downturn

–With files from The Canadian Press and Quinn Campbell, Global News