'An Industry in Crisis' by Charlie Gracey

[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.