Cattle myths and folly

[kpb]

During my latest stint at the northern ranch over the past few weeks, I was away from all electrical devices and got a chance to think harder about our industry. I got to thinking there are several oft-repeated, so-called truths that we hear time and again and are just accepted as truths. But they aren't and the sooner we prick these balloons the better off we'll be.

Here's what I think are the current myths.

1. We will all make more money and be better off by expanding our foreign markets. I hear this everytime one of our so-called industry reps speaks out and quite often from the government flacks. It is commonly accepted wisdom and is also complete claptrap. The only ones who benefit from expanded foreign markets are the packers. They will not pay more for our cattle if foreign markets are expanded but will certainly expand their margins. The packers have access to cattle from all over so will draw from a different place if one place is short of fats. So, how about not wasting any more producers' money (CCA, ABP) on pursuing foreign markets for the benefit of the packers?

2. The cattle industry would make more money if we were more efficient. This myth is a favorite of industry magazines and newspapers (Grainnews) and university profs as well as government ag depts. It's complete balderdash. If you can produce a calf for $200 and I produce for $250, sure in the short term (like maybe a year or two) you'll make more money than me. But in the mid and long term we'll both make less because the packers (and through them the feedlots) will pay only enough for feeders to ensure themselves a steady supply. So I'll go out of business and instead of paying you $300 for your calf they'll pay you $250 and, later, $225. If you don't believe me, ask the grain guys how much more money they make now compared to 50 years ago when they were less efficient. Right.

3.The Canadian cattle industry is fine now that the border is open. Anyone who believes this myth should read the BIG C original statement which outlines the systemic problems we face. The multi-national packers own our industry, they influence both our government and our producer groups. They are interested in one thing only--maximizing their profits and their only interest in paying anything to producers for their calves is to guarantee themselves a constant supply of the cattle commodity. They will always, unless forced otherwise, pay the least amount possible to acquire the commodity they desire.

4. Canadian governments, both federal and provincial, need to provide more funding to support our beef farmers. C'mon guys, the governments have given us lots and lots of dollars. What they needed to do was backstop a few big packing houses and that would have guaranteed our future. The multi-nationals have too big an influence for that to happen. But it would have saved the government a lot of money.

5. The future for the Canadian cattle industry looks bright. Man, I am sick of hearing this from ag ministers and industry reps. Our industry has no control over its future--that control lies with the U.S. government and industry groups that can shut the border at any time, with multi-national packers that can pay whatever they want for our cattle and with upcoming countries like Brazil that produce cattle for a fraction of what we do. The packers would love to deal with a lot less of us than at present since it would give them more direct control of their supply and I feel that's the way we are headed.


kpb

[grassfarmer]

Depressing but true kbp. I would only question your point 4 " What they needed to do was backstop a few big packing houses and that would have guaranteed our future" - Even if that had happened I doubt it would have guaranteed our future.
In point 5 you state that "Our industry has no control over it's future" - We certainly are not asserting any control over our future at the moment but that need not necessarily be the case. Has anyone thought of organising a blocade of Lakeside until they are forced to sell it to a producer cooperative? ;o)

[kato]

It takes a seller to make a buyer. Bottom line, they only pay what it takes to get the cattle in the door.

We are the only ones who say, "That's enough for me, you can have my cattle." If we don't like the price, we have the option of keeping the cattle.

Trouble is, there's always someone who's needing money right now, or has the bank breathing down their neck making them sell cheaper.

Now, what do we do about this? If we knew the answer we'd all be rich.

[farmers_son]

I will add a myth of my own. The myth being supply and demand forces will work to ensure a fair distribution of wealth and returns within the cattle/beef value chain.

I did a little work and calculated that one share in Tyson Foods Inc. purchased at the Initial Public Offering in 1963 would today have earned you a before tax internal rate of return (IRR) of 17.35%. A similar investment in a farm over the same period of time would have generated an IRR of 3.8%. However over that time frame inflation averaged 4.3% leaving a real gain of 13.05% for Tyson Foods and a net loss of 0.5% for Joe Farmer.

Put another way a $300,000 investment in Tyson in 1963 would have generated shares and dividends that today would be worth $248,548,530. In comparison a farm worth $300,000 in 1963 would today be worth $1,436,846.

Although I have not done a comparison for other packers like Swift and of course the numbers are not available for Cargill I would expect that there is a similar wide disparity between the profitability of the packers and the farmers.

[smcgrath76]

I agree with pretty well everything that has been written to this point.
I think that the nature of a commodity is diminishing rate of return. Whoever does it cheaper will sell at a lower price, thus driving out margin and forcing others to cut costs. Ultimately it means either bigger operations or subsidizing from outside sources such as land appreciation, jobs, etc.
I do know that if you want a 24,000 a year income you can pump gas, or if you consistenly clear $200 per calf and have perfect conception and no death loss you can run 120 cows. If you only clear $50 per calf and want a $40,000 income, then...
I think kpb and FS have indirectly hit the nail on the head. The ROI is further up the chain. Unless producers own the processors/value adding components, then spending money to market overseas in a true commodity environement with perfect competition is somewhat insane.
By the way the answer is 800 cows, but probably more like 1000 to 1200 in reality.

[farmers_son]

The disparity between returns enjoyed by Tyson compared to the typical farmer are not explained away by commodities. I would point out that Tyson markets commodities too.

Competition or the lack of competition is the key to understanding why Tyson can make profits in excess of the average S&P benchmark for the same period while the actual producers of the product are realizing only marginal returns at best. Tyson uses its competitive advantage to effectively ensure that no profits leave its hands and make it to producers pockets.

You touched upon the competitive situation when you said "Unless producers own the processors/value adding components, then spending money to market overseas in a true commodity environement with perfect competition is somewhat insane."

[cowman]

Well it is very apparent the market is sending a very clear message to the producer? The message is this: Expect a very poor rate of return on your investment!
Of course the $50 profit per cow is not really sustainable? However lets not forget when you consider that $50 profit, you were also making money by selling your hay,grain,pasture etc. to yourself? And probably making a sort of decent return on those things? Also one needs to consider the tax advantage?
The old heritage ranches south of Calgary or basically tax havens and playgrounds for the wealthy businessman? The fact is the more money they lose...the more they save on the tax bill!
In the "real" world this just wouldn't happen? I doubt many would raise hogs for a tax break? However it is "chic" to dress cowboy, ride a fancy horse at the social brandings, and have a big loaded pickup to impress your buddies down at the Oil Mans Club! You just can't compete with those kind of guys?

[farmers_son]

If anyone is interested there is a calculator that gives the annualized growth rate of the Standard and Poors (S&P) 500 index over the date range you specify at:

http://www.moneychimp.com/features/market_cagr.htm

Cowman: While it could be said the market is giving us that signal I think producers need to consider if there really is a functioning competitive market for live cattle.

I think it is open to question whether or not there is a functioning market when one sector receives marginal returns while other sectors realize well above average returns. The signal I get is that the market is not working and there is no functioning market for live fat cattle, now or before BSE.

I read comments and talk to producers who make remarks to the effect that supply and demand are determining our live cattle prices. What bunk! It is not like we are on a different planet here. We are all providing goods to the same consumer and within any given geographical area there is only one pool of cattle and beef. If supply and demand were working producers would earn a similar risk adjusted return as packers and retailers.

Kato asks what can we do about it. I think the first thing we can do about it is realize we have a problem. Kind of like the alcoholic, producers need to admit they have a problem that needs to be fixed. Before BSE and now as we are in the post BSE world, marginal farm gate returns are driving the primary producer out of business. Producers are not receiving their fair share of the consumer’s food dollar.

If government handouts were the answer, we would see our returns increase instead of decrease.

Obviously there is no competition for live cattle. Forget the past two years and look at the past 40 years, no matter what the Competition Bureau says the packers cannot realize the level of profits they do if they are competing for our live cattle. The balance sheets are the smoking gun. The focus for producers needs to change from competing with one another to forcing the packers to compete for our live cattle. We need to redirect our limited resources from finding markets for the packers to making the packers compete for our live cattle.

[cattleman2]

f_s - You stated that there has been no competitive marketplace pre or post BSE for our live slaughter cattle, how do you plan to correct it?

1) Add a producer owned plant to buy the cattle? One that would pay a premium over (the non-functional market) price offered by other processors, for those who owns shares in the plant? (Didn't the bison people have one of these plants in N. Dakota that filed for Chapter 11 in the past 2 years? Or was it that they were good at killing the bison, just not very good at selling the product off the processing line?)

Why would this producer owned plant be any different than the "tyson/cargill/XL" plants. Their job is to source cattle for processing at the least cost to the plant. Anything more than that minimum price would be reducing the net income from the plant, and the shareholders will be upset (which would be the farmers). Does Lilydale come to anyone's mind in this senario? Producer owned co-operative owned plant, paying a slight premium to the producers as they want the plant to run not-for-profit (as they want the profit on their farms), and then when the market declines (or expansion needs, renovations, etc.) they can't withstand any cash outlay, or losses, and erodes their already weak balance sheet, or have to make a capital call for money from the producers. (NOTE: they just changed structure from a Co-op to a corporation, so does that give you any indication on how it should go...)

And how does a producer owned plant help the beef industry as a whole? Not everyone would be (can be) a shareholder in the producer owned plant so some would still get the "non-functional market" price for their cattle. Is this fair to them? Alot of posts keep bringing up the BIG C as an alternative. How will they improve the prices recieved by farmers? Competition to the big 3? NOT - the big 3 will eat them alive if they don't want them in the business. They will let them build the NEW plant, start killing cattle, get the bugs out, then slowly start increasing the short-term prices to a point where the margins are negative. How long can the plant survive? How long can the owners (the producers) survive making capital call advances to the plant to keep it operating? Then one of the big 3 get to buy the plant for pennies on the dollar, and all the farmers have lost their investment...very profitable venture in my mind for the farmer...

2) Maybe we should just go to a supply management concept that everyone can only have XX cows (spread out equally of course across all the producers in Canada). Feedlots have to sell the slaughter cattle to a marketing board that then dictates the prices to the processors. As a cow-calf producer you can no longer sell any farmgate product (as that affects the supply/demand in the marketplace), you can no longer market into different times of the year, as you will have a set time that you must deliver, you no longer have the opportunity to sell your calves directly to a feedlot as they will have to go throught the board to purchase all their inventory, as it all has to be controlled... Is that what you want the beef industry to become???

Not me. The marketplace isn't perfect (noone said it was), but competition for feed cattle is good, and fat cattle is okay if we have more than the 3 buyers in Canada with capitive supply (closed border). With the border open, there are plants that can now bid on cattle, still trying to keep the price to a minimum, but causes the local plants to increase their price if they wish to kill the cattle in Canada. It does resemble a supply-demand relationship to me.

Finally, if you don't like how the market operates, find a different outlet for your cattle. You don't like the "dis-functional market" for live slaughter cattle - don't finish cattle, sell calves or yearlings where there is more competition, you don't like that marketplace either - GET OUT OF THE CATTLE BUSINESS. There will be someone else to buy your cows and produce the meat that is purchased at the grocery store...

[kpb]

farmers_son, excellent reasoning as usual and your myth concerning free enterprise and the lack of real competition is the biggest one being bought forward now. Until we get the lack of packer competition resolved, we are in the soup. Yet another myth arising from this is that we are in competition with the U.S. ranchers. In fact, ranchers from both countries should be unified in their fight against monopolistic packing practices.


kpb

[farmers_son]

Cattleman2: I appreciate your comments. Those are valid questions and ones that need to be answered. I see the solution as creating an environment where the packers have to compete to purchase our live cattle, which I believe they have not had to do up to now.

You mentioned "tyson/cargill/XL" plants. And that their job is to source cattle for processing at the least cost to the plant. Actually the “job” for these plants is to maximize shareholder value and they have been very good at that. It needs to become our job to maximize value for the producer. Most would agree that the big packers have been fixing live cattle prices at artificially low levels to maximize their returns. That is something we need to influence and to extent possible stop.

Producer packing plants are not the only way to improve the nearly pure competitive environment producers find themselves in. I have been suggesting that producers need to quit competing with themselves by forming alliances and seeking other methods of cooperation. A viable option is to put organize to pressure government for policies that discourage packer monopolies. The packers presently enjoy their monopoly position directly as a result of various federal government regulations that allow the packer monopoly to flourish. Restrictions on inter-provincial trade of non federally inspected beef is one example. CFIA regulations tend to encourage large scale plants that only the majors can afford and discriminate against smaller producer scale plants. Just a couple of examples...

I am not looking to supply management as a solution although I would point out that pre BSE the supply of beef in this country was managed by federal allocation or non allocation of import permits over the TRQ. It never has been a “free market”. The federal governments of both the U.S. and Canada continue to “manage” the importation of beef through various tariff and non tariff barriers. I am envisioning a North American solution rather than a Canadian solution so any suggestions need to be something the U.S. producer would buy into.

Producer packing plants do exist in the United States more than in Canada, we are just getting started on this side of the border. They are one possible solution. Just what the successful model will be is still being developed and there is a learning curve associated with anything new. They certainly should not be ignored as a solution or discarded outright as being socialist or union. We need to consider any and all options to see returns to the producer improve because the present situation is not sustainable through another generation.

As an individual producer there are options to avoid selling into a non functional marketplace. However if you are taking an industry wide point of view then solutions must be found to restore or create a functioning, working viable market for live cattle. Our free enterprise system depends upon functioning markets to fairly distribute wealth throughout the economy. When monopolies are in a position to fix prices to their advantage the marketplace and the free enterprise system is threatened. Without competition all else fails.

[greybeard]

According to USDA market reports, farm share of retail beef price ranged between 40 and 52 cents per retail dollar. Or you can say the rest of the value chain took 48 to 60% of the value. Most of the time over ½ the value at a time when U.S. producer was enjoying unusual prosperity. You don’t have to go very far back in the charts to see when producers got 65%.
I have a friend in retail who says he begrudges beef the counter space because he only averages 15% gross margin. His beef mostly comes in Cargill boxes from a Cargill salesman.
Can a producer owned plant get back to that 65% share? Can they at least maintain the 52% share? Stability makes it a lot easier the fill out those annual reviews the bankers like.
Unfortunately, another myth going around these days is that you can make a minimal investment in a packing plant ($500 - $2500?) and change the future of your whole operation. How can you expect the price of a set of tires to give you that kind of return?

[cowman]

Very thoughful insights from all. I certainly don't have a solution.
Personally I favor the BIG C idea of a producer funded plant that captures all of the available value of our product?
However for that to happen we need a government that will take the bull by the horns and make it possible? And I really don't know if that is possible?
Have we sold out that right, by signing such things as NAFTA?
But wait a minute...who are we? Don't we have a right to see our citizens prosper? Or did we give up that right when we signed NAFTA?
This whole globalization garbage was supposed to benifit us all? Or was it really supposed to benifit just a chosen few?

[cattleman2]

The point I was trying to make about the BIG C is that if there is any extra value being captured it is only for those shareholders in that plant...just like tyson/cargill, not the whole supply chain so is the marketplace really any better?

[cowman]

Well I think BIG Cs plan was that anybody who sold cattle would recieve a proportionate share in the plant? So have a checkoff on every animal sold and you get so many shares/points? At the end of the year you get a dividend based on the number of animals you sold...of course after the plant was paid off? Of neccessity this checkoff would be mandatory for every animal going to the plant. The concept was for a cow plant not a fat plant. I have no problem with shutting corporations out of the cull cow market...where were they the last two years? When the little local pirates and XL were paying 10 cents for cows and reaping massive profits, they gave up their right to participate in the cull cow business? If they want cow carcasses they could buy them from a BIG C cull cow plant? I believe all cull cow buyers gave up their right to participate in the cow market by their blatant ripoff of the last couple of years?
The neccessity of government protection for any new plant is very apparent when you see how Cargill/IBP operate? They have been charged numerous times in the past with using predatory business practices against small competitors?
Unfortunately the only ones who have the power to curb their excesses are the feds and I don't see any willingness there?
A monopoly by a single corporation or a combination of like minded pirates is not real free enterprize? The role of any government is to protect the interests of the people and not to sell their souls to corporations bent on raping the people?
In reality the packers aren't the only pirates...the retail sector is probably just as guilty? Safeway, Sobeys, Walmart also are in on the **** of both primary producers and consumers.
Of course this BIG C plant is unlikely to ever happen as our spineless government knows who butters their bread and when our own ABP delegates consider it some sort of radical communist plot? The fact that the lowly peasant might recieve a fair return for his investment/time/labor just doesn't jive with their philosophy of how the world should work!