Price Risk Management Tools for Cattle Industry

[kato]

At the present time, an open border is not in the best interests of the Canadian packers. (Read that to mean the Canadian divisions of American packers)

You can be sure these companies will be quietly lobbying for such things as no universal testing for cows by coming up with excuses we have all heard such as..too expensive...to time consuming. What it really means is "too much cutting into profits". At the moment they have no competition, no controls, and are still shipping boxed beef into a profitable American market.

In the short term, I think if American producers were in our position, their government would be stepping up and helping them out whatever way they could. Regardless of consequence. Our government needs to "just say no to bullies" and step in. There is more than the beef industry at stake here.

I wonder what would happen if just one independant Canadian packer, even a small one, found a way to test it's cattle (over 30 months). Brand it, certify it, and offer it up on the market. Stand back and see what happened. I bet it would get more attention than any lobbying ever could.

Testing is the best and quickest solution yet. There would not be a country in the world that could justify, legally shutting it's borders to Canadian beef. If a border is shut due to protectionism, then call it that...don't pretty it up by hiding behind "science".

It's also a precedent that's not wanted down south. (Leverage?)

[cowman]

While the solution in the short term might be a direct producer payment I wouldn't bet the farm on it happening. Or if it does happen it will mostly be a joke like the cull cow payment(which incidently I never recieved yet).
The Martin Liberals have pretty well stated they are broke and they have more pressing needs than paying a few broke farmers to stay in business.
The Alberta government says they are going to stand with their producers! Well when? So far who have they helped other than a few big feeders and the packing houses? And don't forget the teachers, doctors, nurses and government employees are all pleading poverty and the need for some more money.
In the next few months I expect we will see a meltdown if the border doesn't open. This could be the hardest year yet we've ever faced? I can imagine there will be a lot of tough discussions around the kitchen table this year? If we get another drought and the border isn't open by this fall I suspect price won't even be a factor. The mindset will be let me out of here!

[rsomer]

Cowman, I agree. I think when charliep asks us to think about longer term issues around price discovery/risk management there was an implicit assumption that the long term industry would look much as it does today. I suggested that the industry could be different with more retained ownership and producer owned packing plants. You suggest that if the border doesn’t open in the next few months there will be a meltdown in the industry. But there is no reason to believe the border will open any time soon. Failing substantial government intervention in the form of direct support for primary producers the meltdown will come in the form of a transfer of ownership of the Canadian cattle industry. The two Canadian packing plants will end up owning the majority of the Canadian beef herd at 40 cents on the dollar. The industry will become vertically integrated as I foresaw but it will be vertically integrated backward from the packing plant level instead of integrated forward from the producer level.
The future of the Canadian beef industry will be determined in the next few months by the politicians. It will be interesting to see what they decide is our future.

[charliep]

Thanks for the cooments. It is helping with thinking. My questions were more related to the commodity pricing versus moving up the value chain.

A couple of questions from the grain side and how they might apply. Some of the new specialty canola/****seeeds are offering long term contracts to grower for set prices (I think $10/bu in the case of high erucic acid ****seed for the industrial market) at levels above long term averages for canola. Another suggestion I have heard (can't say if it is good or bad) is for feeders to enter into longer term supply agreements (maybe 3 years) with grain farmers for feed barley at a set price (say $3/bu). The barley grower would have a profitable price. The user would have a stable supply of quality product.

Would the type of arrangements you talk about work similarly for cattle? Assuming a reasonably stable price at the retail level, separate out value up and down the supply chain. What would prevent cheaters from selling outside for cheaper? Impact imports? Other meat products impact (i.e. pork, chicken).

[cowman]

Charlie: I suspect this type of setup could very well be the future. Basically contracts for everything with some sort of adjustment provision. The thing that I don't like about that setup is you lose true price discovery and the packer/retailer has way to much power. This is basically what happened in the US chicken industry? Everything was contracted. Worked great until Lilydale and their like put the squeeze on both ends? Now Lilydale owns it all.
The cow/calf industry in western Canada is made up of a real mix of people. The majority are small producers who would probably be excluded from the contract process. Eventually they would be out but this does not necessarily mean this land would be kept in that type of production.
Over the next few years we will see a great shakedown in the cow/calf business, I believe. A lot of people are going to leave the industry never to return. The age of the average producer dictates this will happen no matter what, nevermind the complete lack of profit! It quite frankly just isn't worth doing anymore. There always will be a cow/calf industry but it will be very different in the future.

[ValueChainFX]

Cowman and charlie the future is ous to make! I was told that when I was a lot younger than now! I was also told you don't make the future by yourself! Both your talents (Cowman/charlie)can help make the future. Knowing what we all know now means we need to find a way to make it happen and try our best to make it fair and plug the loop holes that have allowed some of the more unfair things to happen! How we do this is going to be how we are judged in the future.

So how do we make it work? How do we include the small producers with the rest?

[rsomer]

I realized your questions were more related to the commodity pricing versus moving up the value chain. You also mentioned risk. But there are certain realities that cannot be ignored specifically relating to many weak sellers and one or very few strong buyers.
For instance the canola contracts....the ones I have seen typically attempt to persuade the producer to sign up for a premium price yet to get that price certain quality characteristics must be achieved. Whether the product delivered actually meets the quality characteristics is determined solely by the contracting company with no independent third party verification. Obviously not a very fair arrangement. But the producer has no recourse, it is the way the contract is written.
I understood that the feedlots that had cattle contracted to the packers before May 20 found the packers backed out of the deal when trouble hit which certainly raises concerns about how well these kinds of relationships work when there isn’t competition in the marketplace.
What has happened in Canada since May 20 and the closure of the U.S. border is that competition is reduced to a point where the two packers no longer compete creating a monosony where the efficient allocation of resources throughout the value chain doesn’t occur. Until the border opens to live cattle trade or until such time as Canada can increase its slaughter capacity and that capacity is owned by players who are in a position to compete for the sellers product there is no working marketplace for beef in this country. Unless real competition is regained and a marketplace begins to function again any solutions such as you suggest, contracts, supply agreements, or other methods designed to stabilize price or manage risk are bound to be unsuccessful. Competition must exist or all else fails.

[pandiana]

I have to wonder how we could ever expect 'real' competition between mice and elephants. The mice must regain the power of united numbers. Cooperatives or supply management!

[rsomer]

Exactly so. Supply management has worked for the dairy and chicken people. I think the new generation cooperatives have a place for the beef producer. People should not expect the new cooperatives to operate like the old Alberta Wheat Pool. New models and methods of structuring ownership will be developed that could provide ordinary farmers with ownership benefits and value added, vertically integrated opportunities that they could never realize on their own. These are real viable price/risk tools that are available to farmers right now.
Farmers totally underestimate how much market power they could potentially have by organizing, forming alliances and taking charge of their destiny. These kinds of cooperatives offer the only real opportunity to have effective competition with Cargill and Tyson Foods.
If farmers would pull together we could be elephants too.

[cowman]

rsomer:How would these new generation co-ops work in relation to a beef plant? Would it be possible to do that?
I know they have had new gen co-ops in the States but I thought they were mainly purchasing type co-ops? And I also heard some of them weren't doing too well?