Price Risk Management Tools for Cattle Industry

[ValueChainFX]

rsomer and cowman, the new gen coops are an opportunity waiting to happen. There are several challenges that need to be addressed. I have just gone through the legal hassles of putting one of these together and had the opportunity to work on some of the early ones in the US!

The first challenge is for us all to understand the legislation and know that even though the legal people want to put you into the old cooperative model, the design is not intended for that to happen. Looking at the US models we can clearly understand that the cooperatives in the US looked at the delivery contracts as a way to give the producer a high price (so they thought even in a low market) they ended up with a tremendous debt load and were unable to meet the producer obligations. They did lock in supply but the cost was to great! I suggest the delivery contracts be tied into the supply chain and actual sales contracts. This takes coordination and also forces the bulk of the product to be sold before delivery takes place. Also some of the tools that are used to add value can be run much the same as a combine or tractor, these machines are needed to get a product to market but don't actually give you a profit margin they stimulate the value of the product produced. This means that a system that can deliver a product to the market with more value than it had when the producer brought it to the machine (or processing plant) allows that producer to increase his or her own ability to make profit. The system is complex yet simple at the same time. Throughout the supply chain you will find many people that are unhappy with the present system. These people are ready to play ball if a consistent product can be delivered on a consistent basis.

[cowman]

I wonder if any American new generation co-ops have been set up for cattle? Occasionally I've heard of something called "Alliance" cattle. I think it is some type of marketing scheme for calves in the US?
If there was a new generation type co-op for cattle how would IBP and Cargill react? Lets face it they don't like competition and have proven over and over again that they will do whatever it takes to get rid of it? And I don't believe Canada has any laws in place to stop them from using just about every dirty trick in the book? Would we need our "industry associations" to lobby the government for some changes? Would that ever happen? It seems the CCA and ABP are in bed with IBP and Cargill?

[rsomer]

There is a description of new generation coops and their potential at:
http://www1.agric.gov.ab.ca/$department/newslett.nsf/all/agpr1470?OpenDocument

Also see: http://coop-studies.usask.ca/pdf-files/What%20Are%20NGCs%3F.pdf

Cowman: U.S. Premium Beef is a New Gen Coop in the U.S. that has, I believe, about 10% market share. See: http://uspremiumbeef.com/

ValuechainFX: I would go so far as to say that New Gen Coops are not just an opportunity waiting to happen they are an opportunity that is happening right now and have been for over 10 years in the U.S.
I think a challenge that has to be met early on is for producers to quit thinking in terms of selling cattle into a commodity marketplace and start thinking about selling a differentiated branded beef product into a consumer marketplace. I noted you comments that early U.S. efforts were geared towards giving the producer owners a higher price for their commodity than they could receive in the commodity market. I see too that U.S. Premium Beef is promoting the fact that their producers got $16 a head more than they would have in the auction. That to me is wrong thinking.
The real benefit to producers is not the $16 a head more they might realize than if they sold a commodity in the commodity market, the benefit is bypassing the commodity market altogether. Lets face it, getting $16 a head more than what the market for fat steers is right now is neither here nor there. We don’t want to be selling into that market period. The commodity market is not functioning due to lack of competition yet there still is a functioning market for beef cuts and branded beef products. That is where we want to be. Commodity markets will break us long term if not in the immediate short term. Beef producers should strive to avoid selling into a commodity market if there is another option such as a producer owned packing plant producing to a consumer market.
It is like selling apples and oranges, the goal is not to get paid $16 more for your apple than if you sold it somewhere else, the goal is to sell oranges and you really don’t care what the apple market is doing.

[cowman]

I see from the Premium meat site that the return of $16 more per calf is one thing but the $95 "dividend" per calf makes that look a lot better!
So lets say it costs $10 million to build a plant capable of killing 800 head a day or 208,000/year(I have no idea if this is realistic). That works out to an initial outlay of about $48 per animal? So if a person wanted to buy shares is $50 a pretty fair ball park figure? If that is the case and you get an extra $16 $95 =$101 then how come we don't have one up and running? I would think it shouldn't be a problem? Is Alberta Agriculture doing anything to promote this idea? How about the ABP? I would think they would be the ones who have the money to promote this, after all they collect $3 every time an animal is sold?

[ValueChainFX]

Ranchers Renaissance is also a new gen coop and Cargil has kinda snuggled up to them! There are several examples of new gen coops that are working to some extent! As pointed out, the commodity market is not the place we want to be, marketing our product as a value added product moving into markets that are hard for the big guys to service is more what we should be looking at!

As far as the government help in making something like this happen they are all talk! Government money for this is just not going to happen! Our associations have taken more issues than they should have and don't really help us the way I believe they should (such as the promotion of more producer capacity).

Also it is correct in pointing out these opportunities are now available in Canada, getting organized to go on the road and promote the program in full has been the challenge, but starting next week the plan goes on the road. The cost of a Fed / EU plant is about $200.00 per sq. ft! I believe that the investment for producers is good, risk management is in place and that you are always going to have the folks that tell you it will not work, even as it is working! The best part of the plan is the industries ability to take the template from the first plant and apply it to their own area!

[rsomer]

There is a question how a producer owned packing plant gets managed and who sits on the board of directors. What is happening in this regard?

[ValueChainFX]

A producer board of directors presently calls the shots on the AVCC board. The plan is to have a professionally managed operation with integrated third party quality assurance. Also the quality assurance will be part of the lab operation and testing is planned for what needs to be tested. Information will be designated as propritory and non-propritory and be available to industry as such! Marketing is done through a marketing consortium with participants across Canada and some interest has been shown from groups outside the country in this arrangment. As it sits now the investment that producers make would be in the building and equipment and kill spots which they can use or share with other producers depending on their needs.

[cakadu]

Just a few points for clarification please.
"Our associations have taken more issues than they should have and don't really help us the way I believe they should (such as the promotion of more producer capacity)." What do you mean by more producer capacity?


"A producer board of directors presently calls the shots on the AVCC board." What does the AVCC stand for?

"The plan is to have a professionally managed operation with integrated third party quality assurance." Who does the professional management and the third party quality assurance? What checks and balances as well as benchmarks are in place to ensure that the organization stays properly managed?

"Information will be designated as propritory and non-propritory and be available to industry as such" Isn't that part of the problem now - information that needs to be shared isn't being shared along the whole continuum? Don't the big guys just deem it proprietary and it doesn't trickle back to the producer? That is one of the biggest gaps that I know of - that producers aren't getting the proper market signals from those further up the chain.

For these things to truly work, there has to be transparency as it is the transparency in the system that builds the trust that is so badly needed.

[ValueChainFX]

cakadu

I believe that the associations are the producers link to the Provincial and federal bodies that are supposed to be there to assist the producers with the challenges that relate to the bulk of the producers. The associations have grown out of touch with the real needs and should be dealing with the government to put real programs in place to help the producers they represent. The funds going into “So-called ag programs have done little to help the grass roots producers! Have not dealt with the real issues of infrastructure to get our product to market (such as capacity) and testing!

The AVCC stands for the Alberta Value Chain Cooperative. A producer organization set up to work with producers with, beef, bison, deer, elk and address some of the issues such as capacity (the main goal is to build a small plant and provide the template back to industry.)

The professional management of the plant will consist of two main components the first a core group of people from the industry that have proven track records. These people will be both management and trainers for the second group that will be used as the core group as other plants come on stream. The checks and balances are an integrated part of the business plan and more information can be obtained through board members or on their web site. (both addresses are in other treads. Bench marks are also set in the business plan and are already present as industry standards. The third party quality assurance has several components and several partners, part of the partnership involves lab resources, training and a special program. An independent quality assurance group is being formed and will participate in the functions of the plant!

Information exchange is both proprietary and non-proprietary and although transparency is required, the industry has been full of customer piracy and therefore some information needs to remain private. But information that is relevant for industry growth needs to be made available, much of this information is part of the trace back / trace forward programs being worked on.

[cakadu]

Is this a continuation of what was being proposed several years ago?

I'm thinking out loud here - if the associations are out of touch with the producers' needs, how can that be rectified? Don't producers in many cases elect people to sit on these associations and if the job isn't being done, then shouldn't new people be put in there?

I suppose in some respects it is no different than any other "p"olitics one gets into, there is generally a status quo that is hard to change.

Shouldn't the associations be held accountable and if they are not, then change what you don't like and keep what you do like. It is always easier said than done but it can be done.

It seems to me that no matter who you put in to run something, they will ultimately control the information flow and who gets to hear what and how often. Based on the historical ways of doing things - he who controls the information has the power. Now, this is not right and it certainly shouldn't fly in today's marketplace, but it does. How does any organization/association or group get to a comfort level or propose to get to that level with those that they serve?

[ValueChainFX]

Your thoughts and responses are interesting and I’m sure have been ponder by anyone that has entered into a public forum.

I believe part of the solution we all look for is in the understanding of a true interdependent system. Each group (and individual in the group) needs to gain something in any transaction. That something has to be worth the integrity of the whole system and something that is hard to give up for the sake of ego or personality challenges.

The proposals have been on the table for years, I started working on Value Chains 12 years ago when they definitely were not the most popular concept on the block! The difference today is the producers have finally reached their own conclusions that they are at the bottom of the industry equity list. What we do today may help us, but in reality what we do today will work better for the future generations if we put the right tools in place. Therefore I would suggest, that those that really want to make a difference put their energies into solutions with like-minded people, and not into finding reasons why the future won't work!