The New Packing plants?

[cowman]

What ever happened to all the talk about all these proposed new packing plants? Or am I just not listening to the right media outlets or something?
Whatever happened to Sunterras scheme to build a big plant in north Calgary? Is that still a go? I heard a rumor a lot of the big boys backing it were pulling out? Is that true?

[grassfarmer]

I asume the Rimbey one will not happen now - one of the main producer backers is the one implicated in the massive fraud involving Blindman Valley Feeders Assn. Looks like they were taking enough money out to build a packing plant but put it in their pockets instead!

[cakadu]

I suspect that raising capital will be the biggest challenge that these proposed plants face. The provincial government has said that they will put no money into any new plants, so that leaves angel investors and/or venture capitalists - who want a quick return on their money i.e. in 18 months or less - the traditional lending institutions, or raising the funds on one's own.

What any of these new plants need to be working on right now is finding and securing markets before they even get into production, which will be another challenge, but one that could be overcome to be sure.

I know that the one in the Peace country is moving ahead. I don't know about the one in the south that was proposed by the Biggs.

I'm thinking out loud here, but would it make more sense for the proponents of these 2 plants to get together to see how they could work together and combine resources, given that they both propose to sell natural, hormone-free beef into the EU?

[rsomer]

I do not see venture capitalists putting money into packing plants. Its not sexy and doesn’t offer the quick returns and early buyout that ven cap and angel investors look for. The most likely source for investment is producers themselves.

A feasibility study and sound business plan including a marketing plan are must haves before any money is committed. Sure there are opportunities out there but there is also competition for available markets. Our present BSE crisis is certain to be over before any plant could go into production so any plants must be viable in whatever the post BSE marketplace looks like. That could include a U.S. marketplace with Country of Origin Labeling in the U.S.

You have raised a very important point by suggesting the various interested parties work together and combine their resources. These proposed plants all say they are going to pursue niche markets and avoid the competition but in fact they will end up competing with each other. Their financial resources are certain to be limited.

There is an opportunity for the Alberta Beef Producers with the resources they have at their disposal to perform a generic feasibility study and the basic market research so 10 or more potential plants do not have to take their limited resources and rediscover the market for themselves. Yes, these plants will be owned by private enterprise but government and producer organizations can play a role in making the plants happen by providing basic support. The more assistance that is forthcoming from the ABP and the Alberta Government or governments in other provinces, the more likely that some plants will actually get beyond the planning stage.

[grassfarmer]

rsomer, the eternal optimist, aren't you forgetting that ABP is happy with the current situation in the beef sector? - they see no problems with the existing packer cartel and fight any suggestion that we be critical of the packers. They also believe the border opening will roll the clock back to a pre BSE scenario.

[cakadu]

As someone who's not terribly up on ABP, could you please explain what would be wrong with a pre BSE scenario? Weren't things moving then and people reasonably happy?

Pre BSE we didn't hear too much about producer owned packing plants - a lot of that talk started after the continued border closure - and the notion of producer owned plants is a very good idea. As someone outside of the beef industry, weren't the majority of people okay with the status quo because at least they moved their cattle?

Shouldn't the ABP be supportive of any innovation, idea, action that helps the beef sector? Please help me to understand!!

[grassfarmer]

Cakadu, my problem with the ABP assumption that we just wait for the US to open the border and things get back to "normal" is that in my experience BSE changes things in a big way, as Ian Ben always says. Don't assume that we will regain all or any of our previous customers - the world is awash with beef and our previous customers have managed without Canadian beef for the last year. They have found new sources and will have to be persuaded to return to Canadian product. This puts our exporters on a weak footing as the customer has the bargaining power to press for a lower price as an incentive to change back over to Canadian.
The bigger problem will be the Packers - don't think this strangle hold they have on producers throats will be given up easily. Yes, in theory the border opening will result in more competition but how real is the competition? I can't see Cargill US division outbidding Cargill at High River on our cattle. These Corporate structures will see they can make a better bottom line by killing here than hauling cattle hundreds of miles to their plants in the US. The only thing an open border will do is allow enough killing capacity if we do decide to reduce the herd or kill a higher number of young cattle.

[cakadu]

You make some very good points grassfarmer. When the announcement was made that there was going to be a target of a 20% increase in the beef herd (pre-BSE of course) there was a few of us who asked the question about where this increased beef production was going to go i.e. where were the new markets?

Then of course the COOL thing came along, together with the knowledge that countries like Brazil have some 160 million cattle that will one day hit the marketplace -- as soon as they get that hoof and mouth problem cleared up. Again, the question was asked about what was going to happen with our beef and the response was "we don't need to worry about it."

Well, post-BSE, we see that we do have to look very hard at what is going to happen with the meat from what we have, let alone any increase. Sure makes reliance on any one market suspect now, don't you think?

We will also have to look at how we enter into various agreements as well. Examples would be signing on for that 7-year moratorium if diseases like BSE were found. Or the more recent Blue tongue anaplasmosis thing. What are we getting in return for what we give up?

I agree with you - absolutely nothing will ever be the same again. We have to create a new "normal" - whatever that may look like.

What may make a big difference in how we do business is to get a sustainable working model for a producer owned plant up and running and expand from there. To start out with several plants all scrambling for dollars is not as sound as working together and getting something established that can be used for other plants.

Sometimes to "do it my way" is more of a hinderance than a help and is one way that the big players can divide and conquer. We need to work together so that we can move forward together.

[rsomer]

"We have to create a new "normal" - whatever that may look like."

What might the new normal look like? The new normal is almost certain to involve shipping fewer live cattle across international borders. Shipping live cattle to a protectionist nation like the U.S. is truly unsustainable. By default that means more packing plant capacity in Canada.

Producers have a tremendous opportunity to vertically integrate their beef operations into the meat packing and value added branded beef product sectors until the void created by a lack of sufficient Canadian packing plant capacity is filled. That window of opportunity will not last indefinitely. I see that there are those in government and industry that believe a producer owned packing plant won’t fly. Yet the ownership of the plant is not the issue, the management of the plant is what will determine success or failure.

A producer owned packing plant has a genuine competitive advantage in the ability to create a very desirable brand image with the consumer. Cargill and Tyson Foods are not warm and fuzzy companies, they have a rather tarnished image with consumers. Producers can capitalize on that. The biggest thing holding producers back right now is a lack of a successful model. However the lack of a successful model merely highlights that the opportunity is still wide open for those willing to take the risk and make an investment in the future of their operation.

Producers should be aware of what a producer owned packing plant won’t do. It won’t raise the price of calves. Since the new normal includes unlimited access for U.S. feeders coming into Canada an effective ceiling has been put on feeders. A producer owned packing plant won’t be able to offer significant premiums for fat cattle over what the big packers are paying. A producer owned packing plant won’t be hugely profitable at least in the short term as it takes time to create successful brands. But a producer owned packing plant can offer a measure of price stability in that the producers return would ultimately be determined by the price of boxed beef rather than the price of live cattle.

Bottom line the new normal will involve finding innovative ways to lever price stability out of the marketplace. Livestock insurance is coming and will be part of that. But the best way for producers to stabilize returns from their beef production is to integrate their operations into the packing plant/value added side. The new normal may involve producers owning a share of a packing plant instead of another tractor.

That involves change, needed change. Government and industry need to offer help if this change is to happen.

[gwf]

QR770 Dave Taylor is having a guest Cam Ostercamp from Blackie, Alberta today at 1 p.m. to talk about the cattle industry. Cam has put a lot of effort into researching the history of the industry in Canada. He is well spoken and has a very good handle on the future. I will post the site that his article can be downloaded from in the next week.
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May 7th, 2004

To: Alberta Industry Meeting – Proposed Slaughter Plant Facilities – Cody Cunningham

From: Gerry Fleming

Subject: Proposed Packing Plants


It will soon be a year since the first BSE and the US border closed, and still in question is when will it open and under what rules. Will it close again (in either direction) if and when more BSE is uncovered? With this prospect of uncertainty for the future, the return to normal prices and cattle movement is not likely to happen. No one wants to be in a position of having their cattle inventory over-priced for an uncertain future, hence a slow price recovery, as long as we are dependent on the US to import the majority of our cattle and beef.

If there are countries other than the US and Mexico that are potential markets for our beef, we should endeavor to explore these possibilities more diligently. If certain tests are required, so be it, we will have to find a way to do whatever the buyer of our beef requires. We are now paying five or ten times the cost of testing, and not getting any results. Spokesmen for the Provincial and Federal Governments and the CFIA have said that we will not test our cattle for BSE. If this is the only reason for Canada to be excluded from off shore markets, it is easier to deal with this within Canada than in the whole of North America. Tyson is on record as saying they will not test any cattle. Why would they? The American market really doesn’t need our beef.

There are four main sectors in the cattle industry; the packer, feedlot, backgrounder and the cow – calf producer. The packers are probably as close to getting back to normal as anyone, and the feedlot and backgrounder (if they can continue to secure feeders at a price that will work) will soon follow. The cow – calf producer will be the sector that has no one to reduce their costs from. These producers are at the front of the line and need help. The government does not have enough money to keep them viable forever. An alternative to the present marketing process is essential for the survival of the Cow – Calf producer and the whole cattle industry.

If the producer that provides the seed stock for the beef chain has any hope of regaining acceptable prices for calves and yearlings, we have to start at the packer level and with the importers of our beef. We have to create a marketing and export climate for our finished beef that will provide stability to the price discovery for all sectors in order to help ourselves.

Why are we having this discussion? Why is this meeting being convened? The answer might be that there is a serious question that maybe there is another approach to the solution. A great many people are saying that we need more slaughter capacity in Canada. There has been this need for years. The interest in getting involved in the business is growing. If the value of beef sales were normal, we wouldn’t be as concerned as we are and, it would be business as usual. There are six or seven packing plant facilities on various stages of consideration and many more are being talked about, but most are looking at a niche market, mainly domestically and the US. Money from investors is turning out to be a big concern. There are also individuals and groups that would like to get into the business as well, but are waiting to buy a defunct operation for cents on the dollar. This is a business decision for those that want to get into a packing industry.



1. Producers should be looking to build a Packing Plant Facility that would export a portion of Canada’s beef production (but all of this plant’s production) to countries other than the US and Mexico.

· A healthy Slaughter and Marketing program for our beef will benefit everyone in the industry and so with the producers having the most to loose, should be prepared to help with the solution.
· Border closures and restrictions within North America for the movement of beef, are political and unpredictable.
· A producer financed plant would acquire and bid competitively for their cattle inventory, but would not have to be in direct competition (within North America) with the two large (American owned) and other medium sized packers that presently dominate the market in Western Canada.
· With 4,000 head a day that needs a home outside of Canada, additional slaughter facilities are required. (There is general agreement on this fact)
· A producer owned plant would only have to process a portion of this surplus to achieve much of the desired results and provide the greatest effect on prices for the least cost and the lowest risk.

2. Why should producers be involved?

· Producers having the most to loose, must be involved in the most effective manner.
· The feedlot sector would be less vulnerable to retaliation by the existing packers, because the Producer owned plant would bid on their cattle competitively.
· A Producer owned plant would have to depend on the open market for cattle supplies, but would not have to compete with the present “packer’s market” for sales of beef. (It would be a different market)
· Private investor funded facilities would have difficulty serving its investors with dividend returns and at the same time pass the price benefits back to the producer.
· Producer ownership would allow the benefits to be returned to the producer through the market place and their ability to pay more for the live cattle purchases.



3. The producers should provide the capital funds.

· There are (I believe) provisions through the Alberta Beef Producers that would allow a check – off levy that would provide the capital requirements for financing a plant.
· A levy of $3.00 per head would provide about $40 million over three years.
· Producer levy contributions would be individually recorded (on sales) and in turn provide a proportional equity interest based on each contributor’s contribution.
· A Levy on cattle sales would allow for bridge financing.
· The more cattle a producer markets the more levies that are paid and the higher the producer’s equity in the facility.
· Collection of the levy would have a sunset clause, so that it would be limited to the capital requirement and then cease, at which time the producer’s contributions would be exchanged for shares in a suitable entity (private or cooperative).
· For the protection of Producers Capital, the Facility Asset could not be encumbered.
· Producers would realize dividends through a general rise in cattle values.
· Capital funding would be available for any facility whose marketing intentions were not within the North American Market.

4. A lease operator would provide the Management, Marketing and Operational Financing of the plant.

· Engage a lease operator to manage the plant and market the plant output in accordance with the overall objectives of the producers to move beef off shore.
· Lease could be long term.
· Lease Operator would provide all operational financing and testing as would be required.
· Lease fee would be negotiable, and may even involve paying the lease operator.
· The operator could be from offshore or be an existing packer operation.


It is essential that cattle producers be given the opportunity to choose this or other proposals as an alternative to the present protocol of marketing Canadian Beef Products. The Alberta Government would be the best vehicle by which the consensus of the Cattle Producers could be determined.


To summarize:
1. Obtain a consensus from the cattle producers in the Province and/or Western Canada
2. Provide producers with the complete proposal indicating all risks and benefits
3. Open discussions with possible Lease operators.
4. Explore export market potential.
5. Discuss and conclude Bridge Financing Proposal.
6. If the above five points were achieved and concluded, then we can get on with the task,

There are many qualified people in the civil service very capable of exploring this proposal in detail. It is important that the producers participate in any endeavor directed at developing an alternative for our beef industry.

Respectfully submitted

Gerry Fleming
Riverbow Ranch
Brooks, Alberta

[gwf]

This is the site that Cam Ostercamp's article can be down loaded from. Itis wothwhile reading.

http://www.lgunderson.com/essay_3.pdf

[blackjack]

gwf ... thanks for the heads up ... I hope the cow-calf industry back this fellow ... he is probably going to get bashed around pretty good by industry leaders ...

[blackjack]

Very good article. Put a lot of the thoughts experessed here on Agri-ville into one easy to read essay. I could hardly find one common sense sentence to argue with, and can't see how our industry leaders could either.

[grassfarmer]

Finally someone with a really convincing argument regarding testing beef and the mess we are currently in.
It also highlights the odds we face given that politicians and ABP/CCA have no interest in this viewpoint.
What can we do to get these things taken seriously?

[gwf]

The bashing has already started. Cam Ostercamp's article has already been removed from the Highwood Auction Web Site. The Alberta Beef Producers don't seem to approve.