Being a low cost producer

[farmers_son]

On being a low cost producer… I do not want to be a low cost producer.

When people talk about being a low cost producer what they really mean is they strive to be a lower cost producer than their neighbour. The industry thinking is that each of us can best influence our profitability by finding ways to raise weaned calves for even less money. If that were true then we all should be very profitable as we have been reducing costs for generations in this country yet we continue to seek ways to reduce costs even more as the carrot of profitability is ever out of reach.

Why do I not want to be a low cost producer? The main reason is as we reduce costs the marketplace i.e. the packers reduce the real price of the live cattle they purchase from us. Now one might say that even so it is necessary to reduce costs in order to stay in business as others are forced to leave the business. Yet continually reducing costs will drive me out of business at some point, it is just a matter of when.

If we consider that the farms and ranches that are in the best positions today have been around for generations then we realize that farming/ranching is a long term investment. To maintain and build on that investment means incurring costs. I have to incur costs today to if I expect our farm to be around 20 or more years from now. As margins continue to decrease and the need to reduce costs becomes more irresistible then there is no choice but to cannibalize our farms future by reducing investments in the next generation. Seriously reducing costs can only be done for a limited amount of time before a choice has to be made to either spend some money on a future or get out.

Some would point out that South America is a low cost producer of live cattle. True they are a lower cost producer then we are and the production of live cattle will shift towards them. Yet they have no monopoly on reducing costs and within another generation the production of live cattle will shift to Africa who potentially could have lower costs still.

How much longer can we reduce our costs. Ten years, fifteen years….The focus of the North American cattle producer has to shift from reducing costs to obtaining fair returns from the marketplace as we rapidly approach the point where we can no longer reduce our costs any further.

[smcgrath76]

Amen to that one FS. That is the problem with commodity agriculture, being disconnected from the end consumer (or vice versa), and few players in the endgame for live cattle.
In my mind a healthy agriculture sector is going to depend an awful lot on producers getting closer to consumers and adding value to their products. Easier said than done though.

[olhoss]

<quote>Why do I not want to be a low cost producer? The main reason is as we reduce costs the marketplace i.e. the packers reduce the real price of the live cattle they purchase from us. Now one might say that even so it is necessary to reduce costs in order to stay in business as others are forced to leave the business. Yet continually reducing costs will drive me out of business at some point, it is just a matter of when.</quote>

Yeah, competition is a bitch, let's all go on welfare.

[farmers_son]

Actually it is a lack of competition that is the bitch. And some would say we are already on welfare with CAIS payments and set asides.

[cowman]

farmers son: You make a very good point about either investing more money or continuing reducing costs and eventually coming to a point where you can't afford to continue? This isn't just happening in livestock but in all agriculture?
How many grainfarmers have delayed purchasing new machinery because the money just wasn't there...and then one day wake up and everything needs replacing! At that time they say to hell with this and pack it in!
Isn't that where a lot of livestock producers are at today?
How many farmers have basically decided "when the tractor gives up the ghost, thats it?"
How old is the average farmer? If you are a few years from retiring does it make sense to buy that new tractor? How many have this mindset? Does it not make more sense to put the "tractor money" into a secure money bearing investment?
No body farms forever. Sooner or later we all quit...one way or the other! We might be passing it down or we might be selling out and that might influence how we operate at the moment? I think everyone should have a long term plan about where they are going? A lot of municipalities offer seminars on estate planning and farm transfers. A good place to start?

[kato]

Low cost, high cost, what really matters is finding a way to become a high profit producer!

I think that comes in bits and pieces over the years. I think we've all looked back at a certain move we made somewhere along the line and said "That was brilliant!". The trick is to follow it up with more brilliant moves.

One of our most brilliant moves happened back when the market crashed in 96/97. We went out and bought a bunch of extremely cheap top of the line heifers and doubled the cow herd for next to nothing.

Anyone else like to share a brilliant move they've made? I bet there are some good ones out there we could all learn from.

[kato]

Remember ..... brilliant! LOL

[olhoss]

"Actually it is a lack of competition that is the bitch."

Then get busy and make some. Stop complaining.

When Weyburn area farmers needed an inland terminal, they built one. Of course the leftists complained about that too.

[farmers_son]

Olhoss. On the one hand it is exactly as simple as you say. Make some competition. And on the other hand it is very difficult. A year ago there was a lot of talk of building competition, today hardly any. Yet the need is there as much as before and as margins decrease the will to do something about it will regain momentum.

[cowman]

FS: Well there have been some plants built? The one at Salmon Arm has added some competition to the cow market? Sunterra is killing steers at Innisfail and maybe soon at Rockyview?
Not real sure how well the others are progressing? The new gen co-op at Pincher Creek is having problems, not sure how far along they are at Spruce Grove or Dauphin, Manitoba?
However Tyson is back in the game after the strike and getting up to speed? They are buying a lot of cows these days? And I assume Cargill high River is operating at a good clip?
Top that off with the numbers going to the US as both fats and feeders and I would say there isn't a lack of capacity? Now there might be a lack of competition but that has more to do with border regulations than real competition for our cattle.

[olhoss]

"On the one hand it is exactly as simple as you say. Make some competition. And on the other hand it is very difficult."

And leftists don't handle "difficult" very well.

[grassfarmer]

olhoss, what insulting garbage you write, playing the "leftist" card to a very intelligent contributer to this forum yet failing to come up with any intelligent input yourself.
Your talk reminds me of Jack Daines who was giving a lecture before a breeding cow sale where he was telling everyone how they should be buying cows as beef was the only thing to make money. The Saskatchewan farmers were all dumb growing grain and selling it at $1 a bu to ship to Picture Butte where the real smart guys are. But back in Sask. they were happy as a "Tommy Douglas" style bailout package was on the way. The implication being that these great free marketers, the feedlot owners, bastions of free enterprise were showing the dumb farmers how to make money.
Ignores the fact that the feedlots were only too happy to set aside their free market principles when a BSE bailout package came along. Also ignores the fact that the longterm profitability of the feedlot sector is a negative number.
These "leftist" taunts maybe play well to the rednecks who seem to believe this nonsense if you repeat it often enough.Unfortunately it leads to a culture where collectively ranchers think they are suffering financially because they aren't as efficient as their neighbours yet individually they are all taking jobs in the oil patch and relegating ranching to a part time hobby.
It also leads to organisations like the ABP (Anti Beef Producers)skewing democracy to follow an agenda that is obviously totally against the wishes and interests of primary beef producers in Alberta as seen by their recent AGM policy votes. You "anti-leftist" people kid yourself that you can beat the world if only you are allowed free enterprise but are laughably niave given the complexity of international trade, politics and Corporate power. And by the way I've never been anything other than Conservative.