Price Risk Management Tools for Cattle Industry

[cowman]

rsomer: I am impressed! You should be in Parliment! I find your reasoning totally correct. I might add, value chain has been preaching the same thing for quite a while now!
But like pandianna, I now ask how do we achieve this?

[ValueChainFX]

The foundation plans can be found on the following web site!

http://www.angelfire.com/folk/valuechain/

There are plenty of hurdles to overcome, however, many of the questions you ask now have been asked and solutions found, or at least explored.

We have talked to some lending institutions that have expressed an interest into lending individual producers the share money needed to buy in! (a separate set of issues here). Ownership of animals as far into the system as possible has several protective measures conceptually built in but shared input costs and shared returns are the most interesting so far. Consistency is a challenge for the whole supply chain, partnership programs and an information exchange system combined with Quality assurance, Branded programs and close working relationships throughout the supply chain will be required. These components have been included in the plan and several of the partners have already come on board to assist in these areas.

The producer group board is meeting on Thursday and will be putting meetings together for Alberta, if you are interested in a meeting in your area I would suggest sending me a short e mail that I can pass along to board members!

valuechain@telus.net

[kato]

A model to investigate might be the Manitoba Pork Marketing Board. The board is run by producers, and producers sell their hogs to the board, which then assembles loads to sell at the best price they can get. I don't hear any complaints from producers about it. They are starting to have the same problem as the cattle in that there are less packers to bid on the hogs, though.

The hogs are paid out based on their grading index, so that is probably simpler than the cattle would be. Nevertheless, there are lots of things about the setup and operation of the board that could be adapted.

A few years ago we had a Beef Marketing Commission in Manitoba. I'm not sure why they scrapped it, though. Maybe someone else can remember.

[ValueChainFX]

Kato thanks for the info, the plan we are working with now is a pilot project and designed to go national when we have proof of delivery. We have had interest from across Canada in what we are doing. The template along with plans and a tie in to the communication and information exchange system will be implemented.

[rsomer]

charliep: I've given some thought to marketing alternatives/tools that might work to support the beef industry in the short term.
I have been told by credible sources that between 60%-80% of feeders over 800 pounds are controlled by this countries two major packing plants. Probably closer to the 80%. If this is true then we will have no functioning competitive live cattle market in Canada until the border is opened to live cattle or sufficient competition is created in this country by competing firms adding packing capacity.
For this reason any efforts to transfer some of the market risk of a feedlot or backgrounder such as myself to the government will not work as there is no functioning market to base such a program on and the packing plants will simply manipulate the prices paid so all the benefits of any program are funneled directly to them.
Worst case scenario, the U.S. will not open the border to live cattle until after the elections this November as every vote is important and there are no votes to be won by granting access to Canadian live cattle. In the meantime, I think the options to assist the primary producer are rather limited in the interim period and must not be market based.
I don’t think there is time or the political will or even the ability under NAFTA rules to set up a marketing board in order to create some kind of functioning market for live cattle. CAISP will help some but that money comes some time down the road, probably after the border is opened and competition has returned to the industry. The CAISP money will come too late for many producers and the rural economies depending upon agriculture.
Something that might work. If it true that 80% of the 800 pounds and up calves are owned by packers then the focus on government support could be on calves under 800 pounds. Let CAISP deal with the 20% of finishing calves of which many would be owned by doctors and lawyers and such. A direct one time payment of money to producers holding calves under 800 pounds as of December 23, 2003 might provide the industry some cash flow without the benefits going directly to the packers.

[pandiana]

An excerpt from News Roundup, Cattleman p40 January 2004 certainly seems to confirms your concerns.

"Packers have been making most of the money in the last few months and those funds appear to be put to work purchasing more and more of the available cattle. Cattle feeder John Prentice of Calmar believes captive supplies are growing at an alarming rate. From 1998 to 2000 about 68% of the cattle in Alberta were purchased on the cash market. That dropped to 60% by 2002. "And if we took a straw poll today I'd bet we'd find it was about (30%). The point is, price discovery is being impaired."

Packers voluntarily report their method of procurement in confidence to Canfax who publish an annual summary but Prentice finds this of little value other than a historical interest. What he and the other feeders at the ABP want to see is Canadian legislation similar to the U.S. Livestock Mandatory Report Act of 1999. "An open market and the discovery of price operates when there's perfect kowledge on both sides," Prentice says. "And we don't have that here now."

The idea of regulation didn't sit well with some of the rancher delegates to this meeting, such as Russel Picker of Bassano who represents the Western Stock Grower's Association on the ABP, "I don't think we should be legislating anything that interferes with commerce," he says. "It may make packers less inclined to work with us. Are we willing to tell the packers andeveryone else whether our cattle are contracted. We should have to disclose the other way too. It can't be a one-way street" " end of quote

[pandiana]

rsomer, maybe you can help me understand your last post. Have you abandoned the retained ownership idea and are counting on government support?

Through these posts, the problems are becoming a little clearer but the solutions just keep getting muddier.

What seems to be happening is the packers, with deep pockets and market power, can secure enough cattle to keep their costs down and profits up.

Suggestions to counter this are to retain ownership through to the packer/retail which would have the effect of top down distribution of profit.

The problem then becomes how does the producer - packer cooperative then go head-to-head with the multinational packer conglomerates? If we are marketing the same product, can we compete efficiently?

[rsomer]

While I agree with John Prentice's comments "An open market and the discovery of price operates when there's perfect kowledge on both sides", I would argue that in our situation the problem is more a lack of competition than a lack of knowledge.
Competition is the heart and soul of markets and efficiency. Without competition efforts to make Canadian beef markets more efficient by regulating disclosure of information will be fruitless.

[ValueChainFX]

There is just no way to go head to head with the big guys, but a meeting this week showed the unwillingness of the big processors to do a total trace system and information exchange! (go figure) Retails will now be pushing for this system and that means it will come soon. I believe the dead line to have a plan in place is some time in June this year. Going outside the standard commodity type product market will help us to establish some better longer term markets and experts can try as they may to make these areas grey, but unless we do something they can't we are going to have a lot of meat in the freezers.

[rsomer]

pandiana: you asked "rsomer, maybe you can help me understand your last post. Have you abandoned the retained ownership idea and are counting on government support?"
Although the producer owned packer idea offered one suggestion of how a producer could market his product and manage his risk, it was a long term solution that offered no immediate relief for anyone who has the misfortune to own market cattle after December 23.
A lot of calves are going to come onto the market within the next few months. Although when those calves went into the lot it was anticipated that the U.S. market would be open in the New Year, it now looks like that will not be the case. What happens to those calves?
In the absence of any competition between the Canadian packing plants, and there will be no competition until the U.S. border is opened to live cattle, what should be done?
Without competition there is no marketplace and no market. None at all. Yes retaining ownership of cattle until slaughter offers advantages and I would wish to see the industry move in that direction. But I would want to see competition in the marketplace before I do that. In the mid term that means wait until the U.S. border is open to live cattle before holding onto calves until slaughter. Long term the producers should seriously consider owning their own packing plants and marketing a branded beef product they own and control. But what about the short term.
The marketplace will not offer a short term solution because a market does not exist within Canada at the moment. Even if a few cattle are moving through the auction, ultimately there are only two buyers in this country. In the short term government is going be involved in whatever solution becomes available if Canadian producers are to continue to own cattle in this country in the future. The least invasive method for the government to do this is through direct producer payments. A more invasive method would be for the government to become the market for live cattle until such time as trade in live cattle resumes with the U.S. Doing nothing is not an option for the government. Retaining ownership of calves and for that matter cull cows indefinitely with no functioning competitive marketplace for those animals in sight is not an option for the producer.
I am suggesting we need short term, mid term and long term solutions. I am suggesting tinkering with the market by making the market more efficient or introducing a risk management tool such as basis options won’t work right now because there is no functioning market for live cattle in place and that therefore government intervention is necessary in the short term until the border opens to live cattle.