How common is this?

[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?

[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