How common is this?

[kpb]

cakadu I am well aware of the difference between vertical integration of an industry and adding value to the products that industry produces. I was merely replying to an earlier thread from Pandiana where it is mentioned that vertical integration improves profitabilty.

Having said that I think that you should re-examine value adding as a means to profitability. Adding value to our product usually means holding onto the product longer, through backgrounding and finishing, then selling it to the packers. As someone who has backgrounded and fed for quite a while I can tell you that the margins in those business are very small and may add something, but not a whole lot, to anyone's bottom line.

I think rkaiser's concept of niche marketing is the only way to really increase profit back to the producer since he holds on to the product all the way to the dinner plate. However I do not see how this can be translated to the industry as a whole since, ultimately, we are producting a basic commodity and do not own our packing business.

To address your example of the chicken at Swiss Chalet. This example is exactly why, over the long term, any commonly-produced commodity cannot receive a premium. Although at the present time those chicken farmers, according to your example, who are producing the "right" chicken get a premium, this will not be true in the long term. Basic economic theory dictates that all chicken farmers will strive to obtain the premium, will in fact breed the right chickens to obtain the premium (because the barrier to entry to the business is low) and will eventually flood the market with so-called right chickens. Long before this becomes the case, Swiss Chalet will do two things--stop paying premiums for right chickens because they will have a choice of so many and, also, discount chickens that are not correct.

This is the story of any commodity based business. The market eventually corrects in favor of the purchaser (the packers, Swiss Chalet, etc.) and at the expense of the commodity producers. The only case where this does not occurr is where the commodity is in perceived short supply (say oil). This cannot be the case in agricultural products where production can be increased in any given year.

So-called value adding to our product is, in fact, a way for the packers to obtain better overall product from us and to penalize product they do not want. As I have said before, the production of cattle, whether calves, feeders or fats, is a commodity business where the price received will not, over time, cover the cost of production because there are many people in the business who are part-timers or who have outside jobs to support themselves. These people are not fundamentally concerned with making a profit from their cows.

kpb

[grassfarmer]

Not that I'm saying it is a total or even partial solution kpb but direct marketing grassfed beef can be a non-commodity business like rkaisers premium beef and earn a substantial premium - for a while. The US example shows that there are willing buyers at US$5/lb if the product is good enough. I believe what you say about the chicken example and how the market evolves - in time there will be enough grassfed beef or organic vegetables and the premium will vanish. It is a way to buy time for now though.

[rkaiser]

The discussion about midsized cowcalf guys selling out is interesting. I'll just bet that when those guys stop, it will be a mad scramble to grab the land for rental, or purchase.

We seem to think that loosing these guys will be the demise of the cow calf thing here in Alberta. I think not.

There are still quite a few dreamers out there who made some money in other industry.

There are folks coming over from God forsaken places like Scotland (right grassfarmer) and other european countries.

And then there are the proverbial tax dodgers who could care less if they make a buck, and most of the time it works better for their over tax situation if they loose a few on the farm.

This population of this old earth ain't slowing down any time soon, and those effects are felt right here on the cow ranches of Alberta and Canada. Ya Canada, even Saskatchewan has it's share of imigrant dreamers. They're called Alberta cowboys who sold out to somebody else.

[kpb]

grassfarmer I agree with you that niche marketing will command a premium for a while. Long term I have come to believe there are two solutions--one is for producers to own their product all the way through the packers and to their own retail labels by owning their own packers. Unfortunatly I believe this is very unlikely. The other solution is to have supply management and a marketing board. I believe this is possible but many in our industry are opposed to it so it may be just my own pipedream.

kpb

[cakadu]

Profits do erode over time in a value-chain situation, but I wouldn't say that they disappear entirely if you do not produce a commodity type product. It isn't easy to direct market or work from a niche perspective because it has to continually evolve and you have to stay one step ahead of both direct and indirect competition.

The type of sheep that we raise do not fit into a commodity situation i.e. they don't get backgrounded, sold to a feedlot etc and we are just as happy that they don't. (We intend to keep it that way too.)

It is a balancing of risk vs reward as has been pointed out in other threads. You assume much more of the risk when you go the niche market route however the rewards are yours too.

It has been our experience that if you give customers what they want, they will pay you for it and pay you well.

There is one thing that has caused me pause and that is how producers "commoditize" what they grow instead of growing what they can sell.

For years people have been saying that agriculture is at a crossroads and I firmly believe that. The ways in which we have conducted business in the past are no longer working for us as a whole in today's marketplace. The lawsuits with the WTO, the border closure and very poor grain prices are all indicating that we cannot do as we did before and expect different results.

We produce and sell locally and don't foresee getting into things in a big way i.e. exporting etc. Having said that though, I'm not sure if 500 sheep can be considered "unbig".

Agriculture is slow to change and I'm curious to know from some of you that have been farming for generations how easy it was to make the move to the current systems we have now. What sorts of struggels and challenges were there in dealing with changes to get bigger?

[kpb]

cakadu, I do not want to in any way insult or downplay what you do. I respect your posts and always read them. However, raising 500 sheep is definitely small by world standards or by the standards in Canada of trying to make a living off your agricultural pursuit.

When I make my posts I am not making them to people who farm for a hobby. I respect these people, who have made good lifestyle choices, but I am trying to figure out a way for all of us who are farming full time to make a decent living. Frankly, the part-timers and hobby farmers do not have to make a profit and that is all the difference in the world between someone who is relying on agriculture to live and those who are not.

Sheep farms in many parts of the world are 5,000 head or 10,000 head. Receiving a premium for raising particular animals that are attractive for local markets will sustain a farmer in the short term but cannot be an answer long term or for the industry as a whole. You are ahead of the market, yes, but your lead cannot be sustainable as the market moves to catch up to you.

I believe your comments that you will always adapt to stay ahead of the market will not work in the longer term either. They are similar to the comments made by grain farmers that they will simply produce more per acre in order to cover increased costs. That, as we have seen in grain farming over the past 20 years, is a downward spiral that even the best farmers eventually don't win.

Finally, I don't know much about sheep farming and I don't know anyone that has a full-time living off a sheep farm. I don't, frankly, think it is possible unless you are running thousands of sheep, as in New Zealand or Australia, to have a large enough gross income to provide a decent full-time living.

kpb

[grassfarmer]

kpb, I have some major disagreements with you on this one. Firstly, sheep can provide a full time income, I came from where it can be done as the South of Scotland is probably the most suitable place in the northern hemisphere for low cost sheep production with the right combination of moisture and not too much cold or snow. I don't think the prairies are natural sheep country.
The economics of producing sheep in Australasia are not great - you need thousands because the return is very poor, main cause is being too far from markets - ie large urban centres.

I suggest you start reading the Stockman Grassfarmer - I was brought up thinking, like you, that scale brings efficiency brings profit and smallholder or hobby farmers are just playing at it.
If you get into this magazine and follow it over time it shows a far more encouraging outlook for agriculture than we are always talking about on this forum. The difference is the realisation that our product is worth substantially more than we are getting for it in comodity markets if we can cut out the middlemen. There are cases of producers on very small farms producing seasonal milk for cheese production from dual purpose cows as well as selling top quality grassfed beef from their steer calves and their returns are staggering. Very quickly the income figures blow away what the commodity person with 150 beef cows can achieve - plus they don't need the huge landbase.
The real pioneer of this in my mind is Joel Salatin from Virginia as he realised that conventional agriculture wasn't working - the young generation were drifting from the farm because they could achieve far higher incomes in the city. His systems now return as much money as a blue collar worker - on a "small scale" grass based farm with all the benefits of country living.

I know it is hard to accept that small can be better than big - I fight this battle every day in my head as I juggle future plans in my head - double my cow herd on rented land which I could fairly easily manage or direct more attention to my fledgling grassfed beef direct marketing operation. It is easier to stick with what you know than learn new skills and that, Cakadu, is why getting bigger has always been fairly easy for multi-generational farms - it's just doing more of what you already know. Expanding is easy as you can borrow against your existing equity and land value appreciation has always made this work. I think what you do is harder - more difficult because you have to learn the new skills but ultimately that is where the paydirt is. I know this in my head but in my heart I'm still in the expansion and bigger is better mode.

Before anyone shoots me down by saying "that's all right for a few small guys in niche marketing but it won't work for us large, efficient producers with 300 cows" I would reply if you are large and efficient keep on doing what you are doing - reality is most of the large producers are kidding themselves as they are only marginally more efficient than the small guys. Farm incomes show that even large operators aren't making a lot of money so maybe they need to consider a different way.

[Cattleman]

I agree with Grassfarmer on this one. There are lots of opportunities, you just have to look at more at other alternatives. Wasn't there an article in the last producer of how a family wanted to farm full time, so they found a market and now live off a seven acre land base of garlic...are they not full time farmers? Kpb, you are only considering the traditional ag, and see the most of the players as part timers, but as things progress the majority of us will be part timers and a very large majority of production will be controlled by a very small few....so which way do you want things to go?
Producers need to realize they are part of a chain that producers food. We don't just produce wheat and cattle. You have to see what the ultimate end product is and develop our own "products" and market them accordingly. And as the small farmers have grown into huge operations, so will some of these "food" operations that people start. As they grow and target international markets. Etc.

For me this is the only way I see a positive future in agriculture for myself.

[kpb]

grassfarmer, I don't actually think we disagree here. I think sheep farming can be profitable in many places in the world, just not here. I confess I know virtually nothing about sheep farming but I do know that a lamb brings about $100 so you need a whole lot of sheep even if you get a premium on top of that and I also have never known a full-time sheep farmer that has lasted in this country.

I have read the Stockman Grassfarmer and Allan Nation's books for many years. His book on stocker cattle, in particular, is very useful. However, I do have two questions for you that have nagged at me about the specialty market situation. Firstly, while it is possible for you or rkaiser or many other people to reach particular markets and thrive, I do not think this is possible for most ranchers. By definition, a specialty market is just that--special and limited--and therefore the vast majority of us cattle producers will not be able to access it. On this forum I am not concerned with the minority of producers who are bright and energetic enough to access special markets. I am concerned with the industry as a whole and the everyday cattle producer. I think the future of the cattle industry is not in niche markets but by grabbing hold of the industry as a whole.

If we do not do this, then we run the risk of devolving into a cottage industry of small, niche players. This is not what I want.

The other concern I have with the niche industry as a whole is this--while you and I agree that it will provide a premium, short-term, to the producer, we may disagree on the long-term results. If you have a grass-fed market and can sell your beef for, say a premium of $500 per animal, why cannot I grass-finish my animals and offer them for sale for a premium of $400 per animal? Ultimately I think that even niche markets compete on price because they remain basically commodities.

We need to either raise the barriers to entry to our business to make it difficult for part-timers to produce our commodity at a loss or grab hold of our product all the way to the plate. And not on a small scale but through large packing plants, owned by producers and through recognizable retail labels that the producers own. In that way the industry as a whole could benefit and become healthy for everyone.

kpb

[cakadu]

$100 for a lamb is very low and it is a live commodity price, not anywhere what we get for a lamb when we direct market. One of the reasons we can and have survived is because we stay far away from the conventional system. We have been asked on many occasions why we don't just run a feedlot because we are so close to Innisfail and the only federal slaughter facility for lamb in the province. The biggest reason we don't is because we would then be at the mercy of the markets, open borders etc.

The lamb markets in Australia and New Zealand also produce the sheep for wool, which they also get as part of their returns on the sheep. Wool markets have been depressed for many years, so wool in and of itself won't make you rich. The difference between those countries and ours is that they traditionally raised the sheep for wool, with meat being the by-product. Here in Canada, we have always raised them as meat animals, hence the wool generally is not of the quality that is produced elsewhere. Wool growth and meat production are negatively correlated which is why you don't see very good wool coming off of the sheep raised in Canada. In recent years it has been my understanding that when the sheep are shorn, the shearer takes the wool in payment for doing the work.

The breed of sheep that we raise is strictly for meat (and conserving a rare breed as well) and it is a hair sheep so we have no wool to worry about and our management costs are lower because they don't need as much maintenance as the wooled breeds i.e. crutching at lambing, tail docking etc. (Crutching is taking the wool from around the ewes udder so that the lambs have easier access to lunch.) The other thing with our sheep is that we can feed at least 2 of ours for every suffolk, dorset etc., which is also of a benefit to us.

I don't feel at all as though we are hobby or part-time farmers and each year gets a little better return wise. We are not much different from most farm families these days where one spouse has to work off the farm - I take a look at all the cattle and crop farmers around me and one if not both of them are working to say afloat.

The other difference between niche markets and helping the whole market is that I don't have to worry beyond my own production (or if things are really busy, I source out from others and can grow that way.) Our expansion decisions are based on a growing demand and not on speculating that prices will go up, a border will open, there is more competition to pay for commodity pricing and so forth.

I believe that there is room for all of us out there and we each have to do what is right for our operation. If it ends up benefitting the entire industry as a whole, then so much the better. I too had the attitude that you did, many years ago, when I tried to get others to think outside the box and shift to a market vs a production focus. It took far too much of my energy and time and quite frankly I just burned out. I will still do what I can towards helping agriculture move ahead and will always believe that the producer deserves to get paid for their product.

[grassfarmer]

kpb, In response to your question of how relevant non-commodity selling is to the mainstream producer I think even getting the average producer to think about it would be worthwhile. They don't realise how big the potential is. We are new to this but last fall sold grassfed fat cattle at around the $500 premium over commodity fats. But we are buying our way into the business by introducing our product and concept of bulk buying to new customers so we still reckon our beef is $100 per side cheaper than store bought beef - although that is a very hard figure to prove with their occasional sales of cheap beef etc. Top line though we talking $1800 per carcase against the store price of $2000 - this is not even talking about premium pricing our product that will hopefully come with time. In the US the demand is now there for grassfed and with some selling beef at US $5/lb cattle are grossing US $3000-$3700 per animal! So maybe a few years from now I will be selling premium beef for CDN $2500-3000. So if we can be smart about this the premium product sellers could be getting these high prices and the general producer who doesn't feel he should cater to niche markets should be able to capture the $500 premiums we are getting just now. So the returns are there for producers if they want them Canadian consumers are already paying enough in the stores to easily reward farmers the extra $500 per animal. But this can only be done by either direct marketing the product using current methods or else we pioneer a new way for producers to own their cattle further up the production line. I want to see producer owned packing plants succeed but I am wary because there is the potential for them to become cumbersome quangos with too many staff and escalating costs. Farmers have a poor record, in my experience, of running businesses - including their own farms.
I have some other thoughts but will post them on a new thread as this is getting lengthy.

[grassfarmer]

grassfarmer, I agree with a lot of what you are saying but don't sell farmers short as far as being good businessmen goes.
With the market fluctations, drought, BSE, import markets to contend with and lord knows what else, farmers have had to be good businessmen to stay afloat.
Farmers have had to show their banker that they are viable, and over the past three or four years that has often been a hard sell.

Where farmers have fallen short is taking advantage of the opportunity to add value to their product.
Many have come up with unique marketing ideas since BSE, and for some, that has put a few more dollars in their pocket.

I have a neighbour that has off farm beef sales and things have gone so well they bought a refer and have beef sales in three different towns each month. They are limited by the number of animals they can get slaughtered, but they have done some very unique things in the way of marketing.
They hire their own two kids and one other student to man the truck, and have sampling areas, where various sausage, steak etc. are cooked and samples are available.
They have specials, such as a free roast with every $50.00 order etc.
Others around here have tried to hang onto the coat tails of these folks but haven't doing the marketing and promotion, so aren't getting the results.
Value adding to farm produce takes time, expertise and marketing....and breaking into a new market is tough business.

There is a U-Pick farm a few miles from here and the folks have worked day and night to make it work. They finally decided that appealing to the travelling public was their best route so they made up signs shaped like whatever was in season and available for picking eg: a huge strawberry, saskatoon, potato etc.
They are self sufficient on their farm but it has taken a lot of work and a willingness to do without a lot of frills in their life, but they certainly are good businesspersons.

[cowman]

The only problem with being a direct marketer is where do you find the time? And in reality aren't you really more of a marketer then, than a farmer?
Not disagreeing that with a lot of time and effort you can do it, and hopefully you are being well paid for that effort?
I wonder how many people who go this route, suddenly realize they can make more money marketing than actually producing the product? Or that they get more satisfaction out of the marketing end than the producing end?
If that happens does a light come on when they realize they can let some other dumbie do the producing?

[cakadu]

Sometimes that is exactly what happens cowman and there is nothing wrong with that. Not everyone is meant to be a marketer, so you let those who can do that and there are those that just want to produce, so let them produce. If the marketer gives the producer a fair price for the product, then everybody wins. It is only when the producer is getting less than a fair price that the imbalance occurs.

Kpb, the same argument could be used in terms of raising cattle - there are other countries in the world that can do it for far cheaper than what we can here because of the fact that we have to feed for at least 200 days of the year.

If there is one thing that I've learned its that bigger is not necessarily better. Economies of scale shrink after a certain point and for each farming operation that differs.

We each have our own tolerance for risk and the rewards come with the risk. There are tools to manage risk and we see one of them as being in control of our product from the time it is born here until it ends up with the end customer.

Cowman, I wouldn't say that it takes any more time than doing some of the things that you have to do to market in the traditional sense i.e. you do your homework, check markets, drive them to the auction mart or to the feedlot etc.

The big difference that we see is we get immediate feedback from customers about our products so we know if we need to make changes or not.

I was recently at an event where our lamb was being featured and one fellow came up to me and asked if our lamb went into one specific butcher shop in Edmonton. I said yes it did and he commented that he remembered it well and that he also remembered that if you didn't get to the shop when it came in, you didn't get any. That speaks volumes to me because that was at least 6 years ago and he remembered. It is building up that sort of allegiance that makes direct marketing worthwhile.

[grassfarmer]

"Have" to feed cattle for 200 days Cakadu?? - that's just a rumour! I started cows on feed 20th December and they were onto half rations by 10th April and off feed by May 24th. This year with an improvement in pastures, management and adequate moisture we hope to feed from late December to early April then cut them off feed. There is a big difference in economics between feeding for 120 days and feeding for 200 days.

I agree on the rewards of satisfied customers for your product. I am dealing with a guy just now that wants to order a whole beef carcase this fall for his extended family - on the strength of having tasted a steak at a co-workers house. The co-worker bought a half from us last year without having tasted it. We are going to start giving these prospective large customers a sample pack to try as it's a lot to expect someone to lay out $1800 on a carcase of beef that they haven't even tasted!