How common is this?

[pandiana]

Within a 5 mile radius of my home quarter, there are 5 farms who have sold their cows, two farm sales this spring and rumors of at least three more that are seriously talking of getting out. This leaves about 3 farms left with cows. Unfortunately for me some of those that sold are my bull customers.

I agree that this is not just a BSE problem. The border opening would relieve some of the pressure for the moment but we still have to deal with the systemic problem of not being able to leverage enough return on our investment to remain profitable 'every year' not just in the boom years. As things are going, agriculture in North America is not sustainable in its present form. If the industry becomes vertically integrated as has been proposed by many, it may become profitable as the industry will them be able to charge the consumer the full cost of production.

What BSE has shown us is that cattle producers are extremely vulnerable to vagaries of trade and nature. The risks associated with raising cattle have always been great but never as high as they are now and will be in the future. Our parents never worried about bio-terrorism, environmental constraints, encroaching urbanization, globalization and world trade barriers.

Any number of diseases such as foot and mouth, Johne's, TB and others as yet not identified, could wipe out production from a farm, a community or a district in the blink of an eye.

We still have weather to contend with which by all accounts I have heard is expected to become ever dryer over time.

With regard to our situation not being as bad as the 30's, I think it is hard to compare. In the 30's farms were more isolated and very dependant on the land. No crop, no livelihood. Todays farmers on the other hand are, by every estimate I can find, substantially subsidizing the farm enterprise with off-farm income. NB That was a very good point about Alberta oil patch contributing to farm income. I wonder how non-oil provinces fare?

[grassfarmer]

I agree with your thread Pandiana apart from the part where you say "The risks associated with raising cattle have always been great but never as high as they are now and will be in the future."
Historically the risks were far greater and the implications more severe. Look at the severe winter 1886-1887 when lots of guys lost 60% of their cattle. They didn't have the comfortable option of trucking in feed from other parts of the country. Or the years when there were market collapses when cattle were on boats headed to Europe and were rendered almost worthless overnight.Producers faced more instant ruin in those days yet the survivors arguably had better opportunities to expand and consolidate.
As society and settlement has advanced we have reached a new comfort level where even today if we decided to pack in cows our land in Central Alberta would be worth $1000-$2000 an acre which is still a large security blanket.
The day the beef market totally collapses and land prices really fall we would be in a different position.
In agriculture we often get caught up in talk of low profitability but longterm the banks still view agriculture as a far safer bet than many other businesses because of our generally appreciating land values.
I would argue that although we are a very low return business we are a relatively secure business.

[kpb]

Our industry has become more concentrated in the past two years, not less, as we have failed to respond in a meaningful way to the border closing. Pandiana's comments are correct but I think I should point out that vertically integrating our industry will not, ultimately, benefit the primary producers.

Vertical integration generally comes in any industry from the top down as the wholesalers and retailers seek to control their supply and fix their costs. In our industry that would mean that the packers would fix their supplies through alliances and deals with the feedlots, thence to the backgrounders, thence to the cow-calf producers.

This has already been started and will be accelerated in the future. The beneficiaries of this will be the packers, only, and the history of most industries where vertical integration has taken place shows that the primary producers end up either disappearing in favor of "managed operations" or becoming basically indentured servants of the big companies who would set consistent management practices including (in our business) prices, feeding schedules, breeding programs, etc.

Vertical integration in an industry always takes place to benefit the powerful members of that industry, not the weak and divided. We are the weak and divided in our industry and we will continue to be taken advantage of by the strong and powerful. Vertical integration ultimately makes the powerful more powerful.


kpb

[farmers_son]

When we talk about risks, we should do in context with rewards. Risk is acceptable if the rewards are sufficient. I believe the risks were greater in past years but the contribution per head has declined dramatically since then, especially if viewed in terms of a constant dollar. It will be a decision individual producers need to make if the rewards from cattle production are enough to offset the threats that Pandiana outlined, which certainly have always been there even if we producers tend to ignore them most of the time. Any operation financed with borrowed money is very susceptible to even slight changes in cash flow. You are only as secure as your ability to make your next payment.

Land should be considered a separate investment from cattle. In terms of the overall Canadian cattle industry, the land prices in Central Alberta along the Queen Elizabeth II corridor are an anomaly while cattle prices would tend to be somewhat consistent over a much larger area. Land prices have declined in the past and certainly could do so again and have done so in Saskatchewan and elsewhere in the country. Land prices are sensitive to rising interest rates which is an external threat to the industry.

I doubt very much if the person buying said land for $1000 to $2000 per acre considers it a security blanket. Assuming they borrowed for the investment, I would not be surprised if they may have trouble sleeping at night.

[cakadu]

kpb - there is a difference between vertical integration and value-adding in which the producer benefits. Some of the differences you have already mentioned and sometimes in verticial integration the producer doesn't even own the animals he is raising. You buy the feed made at the company's mill, send it to the company owned processor and it is then shipped on to the wholesale and retail outlets owned by the company.

In value-adding the basic premise is that at least 3 players in the "chain" are totally separate entities and are at arms length from one another. The producer grows said goods according to criteria and specifications set out by an end user, whether it be the retailer or food service or a customer.

An real-life example of value adding involves chicken producers and Swiss Chalet (owned by Cara Foods). Swiss Chalet had customer complaints about the differing sizes of the quarter chicken white (I prefer white meat so that's what I will use). When patrons looked at someone else's plate, the chicken portions were sometimes significantly different. What they did was to get producers to get birds to a certain size and weight to get into the program. If birds met the criteria then they qualified for a premium. Interestingly enough, less than 30% of the birds made it into the program, so sometimes achieving results is not easy.

In the end, producers were getting paid more for their products, customers were happy because meals were approximately the same size, which translated into money for the company.

I agree with pandiana's statements and think that the silver lining to the BSE crisis is that producers were finally able to see how they have not been getting the value for what they produced.

Emrald, in my area I'm reasonably certain that land is going for $2000 an acre and up, especially since they seem determined to set up Gleniffer Lake as the next retirement mecca. Only problem with getting high prices for land is that you have to then turn around and pay big prices for land unless you are willing to relocate far away from the corridor. To pay those prices for land does not make sense from a production standpoint and I wonder how many can afford to pay big money for land to not have it do anything. Leasing is an option, but I'm not sure how feasible that is for everyone.

[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?