'An Industry in Crisis' by Charlie Gracey

[boytefarms]

What Charlie doesn't say here is the big reason for the 'great exodus' was BSE. How many of us told our young adult kids to go out and do something else because there didn't look to be a future in the industry. Now, trying to draw them back, the question of stability in the marketplace remains. But I don't believe that 'vertical integration' is the answer. That is the term I see floating around behind what Charlie is trying to say.

Another reason for the hesitation from the younger generation may be the constant attack that we come under from environmentalists, vegans and the like. (UN anybody?)

http://www.canadiancattlemen.ca/2016/12/23/an-industry-in-crisisis-there-a-way-back-cow-calf-producers-hold-the-key/?utm_source=FBC+Publications&utm_campaign=9b8992c9 2d-Canadian+Cattlemen+daily+enews+Dec+24%2C+2016&utm_ medium=email&utm_term=0_2da8244677-9b8992c92d-88078981

[WiltonRanch]

Only new entrants that stand a chance of making it would be grain guys looking to diversify. Unless grain really goes south I don't see that happening. Maybe more marginal type areas but improved farming has improved yields on poor land so the need to run livestock is not like it used to be. Where growth will happen is with already established operations with the ability to expand. Problem is they are getting fewer and fewer.

Our cattle industry thrived before because of cheap land, a short growing season, and a need to value add barley and off grade grains. Now, things have changed. Sure we will still have cows around there's areas that need them but I think for the large part the industry will contract some more. What I fear we will lose packers and an opportunity to market feed grains.

[grassfarmer]

Here is my reply heading their way.

"I was most disappointed to read the article “Cattle Industry in Crisis” in your December edition. While it is pleasant to speculate about better rancher/feedlot relationships I find it incomprehensible that an industry analyst like Mr Gracey can’t see that the real cause of the crisis lies beyond the farm gate. The reason there is a shrinking cattle sector lies in the systematic value theft from cattle producers by the packing and retailing sector over the last twenty years. This is clearly demonstrated by Statistics Canada data showing that the difference between live slaughter cattle prices and retail beef prices (the spread) has more than doubled during this time period. Even at the recent peak of slaughter cattle prices the spread was still twice what it was back in 1995. As producers we should not labor under the illusion that cattle prices were “too high” and we didn’t deserve them - consumers were still buying the beef and packers and retailers were still making money.

Some cattle groups in the United States have started to ask hard questions following the cattle price rise and it’s more rapid collapse over the last couple of years. Their suspicion is that the cattle futures market is being manipulated by the packers as the wild volatility does not reflect market fundamentals and is often totally disconnected from the cash market. They further speculate that the purpose of this manipulation is to influence lender’s willingness to extend credit for feedlot cattle purchases. Is it a coincidence that earlier this fall rumors abounded that some Canadian feedlots couldn’t bid on calves as their lenders wouldn’t extend credit without slaughter contracts being in place and packers weren’t forthcoming with said contracts?
It has often been said that vertical integration wouldn’t take place in the cattle sector because the packers couldn’t afford to buy the cow/calf land base. If, however, they can control the financing of cattle going into the feedlot perhaps they see a way to gain the same level of control over the industry at essentially no cost?

While it may serve the interests of packers and retailers to perpetuate the myth that it’s “just the cattle cycle” I find it disingenuous for cattle industry leaders to do the same. With their recent self-awarded increases in check-off funding you’d think Canadian Cattleman’s Association and it’s Provincial affiliates would come out fighting on these issues on behalf of their members - sadly their silence is deafening."

[perfecho]

Many call it "market forces", especially those that think we live in a "free market" .....call it what it is...market manipulation! And, it is likely to get worse.....

[ag-boy]

charly grace never was a cattle man ! he talks about crisis, we always had them in farming
and look how so many prosper and do well ! no better place to raise a family and are community minded people.
we are starting a new year so like to wish you all a happy and good health in 017
let us be a little possitief and keep reading and commenting on agriville yes we learned from each other

[grassfarmer]

Further speculation from US sources as to what is going on in the beef sector - any of our "industry leaders" in Canada awake or are they sound asleep in bed with the packers and retailers?

[URL="http://m.hpj.com/opinion/i-don-t-buy-it/article_598f4fd6-c313-11e6-92e6-d7a91bf0831c.html"]http://http://m.hpj.com/opinion/i-don-t-buy-it/article_598f4fd6-c313-11e6-92e6-d7a91bf0831c.html[/URL]

[perfecho]

A good rant, lots to think about.
I do recall the tactics of the Ab gov in the late 70's....hard to borrow from the farm startup unless you were building large dairy or large hog operations.
As automation/robotics take over many jobs, operations become larger and more efficient, we are, and its starting, going to have a real issue with employment and keeping people busy with worthwhile endeavors. There will likely be an even bigger spread in the middle class, and those in the lead will have a hard time sharing...because "they deserve it". The dreams of robots and efficiency doing the work and people sitting back in leisure will not be what it is cracked up to be.
Think "small" may find it's day again......but only after some tough lessons.

[westernvicki]

I bought a cow herd 3 years ago just as prices were rising, thinking it was a good business and for me a life long bucket list item, so with my hard earned money in stocks which were under performing (other than the railroads of course) I cashed in and bought cows.. and bulls, and learned that the term BS was also well deserved for various reasons.

I debated bison, but not owning pasture land, cows were the only red meat option with access to pastures to lease. Well 3 years ago the industry looked like a great place to be, calculators worked and ignoring the best advise of cattlemen and their wives I entered the beef industry. I was you see an a exporter of grain I had overseas contacts interested in purchasing beef, so export diversification should be an option worth exploring.

Well 3 years later, this is what I have found market diversity is VERY limited western Canada, we are highly dependent upon a US border. The one fellow who used to supply beef from western Canada can no longer, he sells out of eastern Canada only as his supply chain was bought out and terminated. And while I am far from an expert, I hope to be corrected it seems to me we simply need to be able to have access to slaughter facilities to encourage access to overseas markets and create new streams of demand. But beef is low on governments totems polls, and despite declining demand for feed affecting grain markets little notice is taken of a shrinking industry.

Beef is a four letter word and despite nutritional information to the opposite the vociferous environmentalist is driving an increase in barn fed poultry and chicken versus free range beef: go figure!


The industry is changing, no longer can a farmer afford a small herd, there is just not enough money for the time, and so the big are getting bigger, herd sizes are increasing while herd numbers have decreased, that is the trend in all business, however a certain element of diversity & competition is necessary in all sectors to insure that the widened gap between producer and consumer is tempered by competition. In cattle it appears to be lacking.

The business model, sucks. It needs more market diversity and we need to be able to supply Canadian beef to world markets, and select buyers globally, as beef is indeed the best diversification factory on 4 legs making protein out of waste land, and low quality commodities.

Perhaps beef has been ignored long enough.

[grassfarmer]

A thoughtful response westernvicki and good to hear new opinions and experiences on here. Most of us here on Agriville were in beef through the BSE decade and spent much time discussing the need to access export markets. Logically that would be the key to unlock the no-competition scenario we have here in Canada. Unfortunately it wasn't to be. The collective forces against us - packers, retailers, Governments, cattle Associations made sure that this "escape route" for cattle producers would be barricaded. Their intent was to keep a captive supply here and they have been successful.
There are ways around it for individual producers - direct marketing which we have done is one solution. I believe ultimately there has to be a solution for the commodity beef sector or it's decline will continue. I don't believe the solution any longer lies in accessing foreign markets, we shouldn't have to pursue that avenue. The solution lies right under our noses and always has.
The short lived "high" cattle price period we just came through was based on peak fat cattle price of $200 cwt which led to prices ranchers could hardly believe for calves, yearlings and cull cows. Based on the figures in those graphs I posted an ongoing fat cattle price of $250 would require the packers/retailers to give up less than 50% of the increase in spread between farm gate cattle price and retail beef price they have captured since 1995. Ranching could be very profitable based on prices higher than we saw over the last price spike and we could have it year after year. The packers and retailers would still be profitable and consumers would not need to pay more for their beef. Basically we need to get our fair share - simple as that.
Assuming politicians and regulatory bodies like the Comp bureau will continue to be in bed with the packers/retailers it's going to take action by cattle producers to achieve this. A starting point would be to blockade the major beef slaughter plants for a week - no cattle in, no beef out to demonstrate to the packers that they don't hold all the cards - without us they would have no business. Believe me by about day 3 they would be getting worried. Once we get done with them we could blockade beef supplies heading into supermarkets. We have the power - but would we ever dare use it?
Similar things are happening in Europe - especially in the dairy sector so this is not new territory by any means.

[smcgrath76]

There are some very good points. We certainly need diversification in markets. One of the challenges I think the packers would mention is consolidation in the grocery business. In a lot of respects they are facing the same consolidation we are on a much larger scale, with few players.
We have done a lot of work to try to move at least a portion of our cattle business into the food business and out of the commodity business but it has been slow and expensive and for us to make the jump all at once would be extremely capital intensive. We have lost a lot of money trying to diversify the players in the processing industry and are still working on moving towards more productive alliances, rather than dump and run marketing.
I still think one of the challenges we face is that a lot of folks have cattle for fun before profit. Additionally, I think we have a lot of traditional thinking and a lot of equity built into a historic system. It takes a real push to create change and a lot of times it is simply easier to quit. We are one of those herds that has been expanding as it continually takes more cows to cover overhead costs simply due to inflation and other factors. Trying to get into the food sector changes that math a bit. I am not sure that Darcy isn't correct and there is a place for small as the new opportunity. That said, there is also a decline in small processors and an increase in small regulations, so the costs of small are also going up.
I think we will continue to see an exodus and I am not sure anymore if that is good or bad. It may actually help spur some innovation or it may just make us a high risk contributor of feeder calves to US processors.

And welcome WesterVicki! I appreciate your comments.

[grassfarmer]

Sean, no doubt there is consolidation in the grocery sector but there is still more competition in the retail sector than the slaughter sector based purely on # of operators. I don't claim to know who takes the lion's share of the $ beyond the farm gate but I'd be very interested in knowing.
You say one of the challenges we face is that a lot of folks have cattle for fun before profit. An increasing number (maybe the majority?) are in a similar boat I'd guess but not so much "fun" involved - their cattle operations having to be subsidized by other income - because there is not enough money to be made as things currently are.
How many can afford to buy land or modern machinery based on the profits from cattle alone? Darned few I'd venture. And if that's the case what kind of industry or business model is that? Really pretty pathetic given how much is being made elsewhere in the "value chain". Ultimately I think there has to be a reset that allows us to capture some of that value. I don't believe running bigger numbers with declining margins per head is any kind of future. I think we should set our sights higher.

[smcgrath76]

How many can afford to buy land or modern machinery based on the profits from cattle alone? Darned few I'd venture. And if that's the case what kind of industry or business model is that? Really pretty pathetic given how much is being made elsewhere in the "value chain". Ultimately I think there has to be a reset that allows us to capture some of that value. I don't believe running bigger numbers with declining margins per head is any kind of future. I think we should set our sights higher.

I agree with that whole heartedly. I think waiting for the industry to do it is an impossibility. Actually based on some of the discussion around NAFTA at the moment (particularly this morning re: the US position on tribunals, and labelling) I think that we are probably going to go through a serious period of pain that will result in a radically changed industry. Add to that the pressures from environmentalism and the fact that forage as a carbon sequestering system (as an example) is being outweighed by the grain side. I think we will ultimately see a much smaller industry with perhaps more producer ownership past the farm gate. I am also pretty convinced we will see a lot of prairie ripped up to make way for grain farming, and that corporate concentration in that business will increase.

Right now I feel that a lot of the reason that beef is slow to get on the corporate bandwagon is the relatively low input per acre. If you have a farm on the hook for $300 per acre of inputs and control the marketing channels, it is a good business case and you don't have to own the land. With cattle we can be less dependent on inputs, although I do agree that the marketing channels are pretty controlled. I still look back at NB and think, what a brilliant plan. A few million invested in markets and $100 million in a plant to control half of the land used for beef production in Western Canada.

I would also argue that it is tough to change partly because the equity is so deep. If someone has 100 quarters paid for, does it really matter what they pay for the 101st? Additionally, many business plans involved leveraging the increase in land equity. Buy a quarter for $20K, buy the next for $50K and I just made $30K because now my old quarter is worth 50. Multiply by 100 quarters and $600,000 and you can see what is driving a lot of the business and investment. It is not on ROI, but ROE. My feeling is that unless you are selling, it is statement money, not real realized real estate profit. The housing market in Lloyd is a good example. In the last year, your paper investment in a house lost 15%. If you are selling that is a realized loss, if you are not selling it is not.