Poor Packers?

[cowman]

I think you underestimate the power of Safeway, Sobeys, Walmart etc. but whatever!
I wonder if this meat packing business is so profitable how come there are no venture entrepreneurs willing to jump right in? You would think they would be lined up...check book in hand?
The fact is Cargill and Tyson dominate the industry and that is unlikely to change?
At the height of the BSE crisis in Canada many plants were proposed? How many are actually up and running...and more importantly how many will still be around in five years?
Now I don't want to rain on anyones parade! If you want to put your money into a private venture...all the power to you and the best of luck!
Myself I see Cargill and Tyson further consolidating the industry and integrating it up and down the line? I guess if that means they take all the profits then I have to make a decision about whether I want to work for nothing? Hmmm...getting pretty close to that right now?

[grassfarmer]

If Safeway, Sobeys, Walmart have so much power Cowman how come during the BSE crisis and very low cattle prices they were in the same position as the consumer - ie paying virtually as much for their beef supply as before? It's clear the extraordinary profits stopped at the packer level.

[cowman]

Well I doubt they went bankrupt or anything?
I'm not saying the packers didn't make a killing on BSE...it was a unique situation?
But if you believe the packers stated profits of 1% to 3% in average times, then who is making the money? If the cow/cal guy isn't making any money, and the feeder isn't, and the packer isn't, and the retailer isn't....what does that mean? Is beef way to cheap?
Now bare with me one moment: In 1973 I went to work at a packing house. Newly married, baby on the way, didn't want to be out on a rig. Got $3.95/hr. Bought a new half ton pickup for $3655! Gas was 11 cents a liter. cigarettes were 45 cents a pack, beer $2.50 a dozen for Molsen Canadian(the things we remember!)! I believe we sold heavy feeders for 37 cents that year...and that was very good!
Now skip ahead to 2006? I see they are advertizing for packing house workers to start at $12.84 or 3.25 times as much as 1973?
gas is $1 liter or 9 times as much?
cigarettes about 20 times as much? A truck about 10 times as much? Beer probably close to ten times as much?
Now how about those heavy feeders? At 96 cents today that comes to 2.6 times as much!
Bottom line here is beef hasn't kept up and workers wages haven't kept up?
If we got the same increase in feeders as gas we would be getting $3.33/lb! As for cigarettes....$7.40!
How long can this "commodity beef" thing continue? When gas goes up to 12 or 14 times the 1973 price where will we be?
Despite what people believe food prices are very cheap in comparison to virtually every other thing we produce? Which also partly explains how wages have been able to be kept so low?
Now personally I don't see this trend changing...in fact I see it accelerating? So what can a person do?
I think you go with the flow. If one thing doesn't pay you find something that does? Maybe we should all quit this food thing and get into gas, trucks, cigarettes and booze...because obviously thats where the money is? Just my opinion.

[grassfarmer]

Cowman,"But if you believe the packers stated profits of 1% to 3% in average times, then who is making the money?"
I don't believe them.

I stand by my earlier statement: It's clear the extraordinary profits stopped at the packer level.

[farmers_son]

Hi folks. Just thought I might add a few comments…

First…we are slaughtering more animals now then a year ago 61,500 this week compared to 55,650 a year ago. All grades are up over a year ago but cows are up the most 4500 this week compared to 900 a year ago. So slaughter has not been cut back.

To date in 2006 we have exported over 210,000 live slaughter steers and heifers to the U.S. Last week we exported 20820 live slaughter steers and heifers to the U.S. plus 9828 feeders.
See: http://www.ams.usda.gov/mnreports/WA_LS635.TXT

The live cash to cash spread is over $200 per head this week or in other words a live steer sold in the United States brings that producer $200 more than if that same steer were sold by a Canadian producer here at home. Unless the costs of slaughtering a steer are $200 per head higher in Canada than in the United States our “poor packers” are still sticking it to our Canadian producers and are still reaping unfair profits at our expense. Instead of “poor packer” why not use the word “pirate packer”, it applies today just as it did 3 years minus a month and 15 days ago on May 20, 2003.

I did some calculations a while back and posted the results on this site to the effect that an initial investment in Tyson would have earned the investor an annual compounded return in the range of (if I recall correctly) 18% with share splits and dividends factored in. A $300,000 investment in an Alberta farm in 1963, the year Tyson went public, would today be worth about $1.5 million. By contrast if one had invested that same $300,000 in Tyson shares they would be today worth over $13.5 million. “Poor packer”... I think not.

Cargill and Tyson are vulnerable to competition from producer packing plants. At some point producers will realize that these packers are manipulating the live price of cattle and simply refuse to sell to them. However we have an interesting market in this country where the people actually raising the cattle are not the ones selling the live cattle to the packers, this is done by feedlot margin operators who really do not care what the live cattle price is as long as they have a positive margin. Cargill and Tyson do run a tight ship but that does not mean those benefits get passed down to producers. Within a generation we will see producers owning and operating their own packing plants, there is simply no alternative as the present situation is not viable.

I for one think it is a national disgrace that we do not have sufficient packing capacity in this country to slaughter our own production and that we export live cattle to be slaughtered in the U.S. We will never have a viable cattle industry in this country as long as we are dependent upon shipping live cattle over international borders.

[cowman]

Well good to see you back farmers son!
I wonder though, if packing is so rosy, how come regularily it is reported in the papers, beef mags etc. that operating margins are in that 1% to 3%? Is the whole darned world a bunch of liars who put up whatever numbers suit their fancy? Why I even believe the ABP newsletter used to use those type of figures? When you read the packer report in the Cattleman magazine...you wonder how these guys stay in business? It seems like 3 of every 4 quarters packers operate in the red according to this report!
Now I'm not sure of the big picture...I can only speculate on what I see in the "little picture"? What I see is: The old and the small producers are leaving or have already left? Someone is buying all these cows and I would bet it is with the banks money? kpb, sean and others on here are saying the calf market will sink to very low dollar numbers within two years?
Which leads me to conclude...there is a major wreck coming down the tracks in a couple of years! I think a good portion of the "expanders" will then leave the business? Who will buy the cows?
This whole thing baffles me?
The USA continues to play games but is still our major market? Without a doubt they have convinced many Canadian cattlemen to get out of a game they can't win? Now if...and this is a big if....the US played fair and allowed a truly continental market...would there be a single packing house in Canada?
Lately I have really been wondering if this cattle business in Canada is a dumb thing to be in? I don't think producer plants are the answer...just don't see how they can really change anything...in the big picture. Just my opinion.

[farmers_son]

We do not have a functional market for live cattle in this country. No wonder why a producer is baffled. Only two major packers in this country and a whole range of protectionist restrictions on our ability to export live cattle into another country which provides the only competition for live cattle. Like how sick is that?

We cannot ignore captive supplies when considering packer profits. Our two packers can choose to either make their profit on the live animal or on the processing of that animal by manipulating the live price which they control. Packers in the red, packers in the black…they are always in the black at least in this country when you consider the cash to cash spread. There is no way a packer in this country can loose money if our live price is $200 under the U.S. price. And that is on steers. The Canada/U.S. live cash spread on cows is over $400 per head yet the wholesale price of hamburger is comparable in Canada to the U.S and hamburger is trading at pre BSE prices.

Think of it. I have been told the line speed in a major packing plant is one animal every 30 seconds. At $200 cash spread they are making $24,000 an hour just on the spread. Last week we slaughtered 61,500 animals, mostly calves and some cows. Even using the lower number of $200 per animal our “poor packers” made $12.3 million in one week alone at the direct expense of the person producing that animal. Every two months Canadian cattle producers are loosing enough money to the pirate packer monopoly to build and completely pay for a brand new ultra modern highly efficient packing plant of their very own. That amounts to six packing plants in one year, enough capacity that we would never have to ship another slaughter animal across an international border.

Re “there is a major wreck coming in a few years”. Gee I thought we just had one. Felt like a major wreck to me. The cows will still be here in a few years, what other use is there for the grass? Some cows will trade hands but for the most part any wreck will just further erode the equity of the primary cattle producer just like the last wreck did.

It is not so much that the cattle business is a dumb thing to be in. But isn't it dumb to not see the need for change. I am not saying that the packing plant side would not be without risk but it is like this. You are standing on the rail tracks and a train is coming towards you at full speed. There is a risk of jumping off of the track and skinning your knee or even spraining an ankle. There is no risk to staying on the track, only the certainty that in the very near future you are going to be a spot on the windshield of a speeding locomotive.

There is only one simple truth, either we as Canadian producers develop our own domestic packing industry that we own and control or we or our children make a living doing something else. But just like a deer in the headlights we stand frozen on that rail track watching the train get ever closer and closer.

[kpb]

farmers_son, the argument that I have heard before that because we have lots of grass and lots of land that we will always have profitable cattle is not correct.

There have been major wrecks in this country before--with lots of grass--and there will be again. A lot of the time these wrecks are foreseeable--they are based on the cattle cycle and the supply and demand curve. Our recent BSE crisis was damaging but not a wreck by any stretch. In fact calf prices in the U.S. were the highest they've ever been. We missed out on those high prices, yes, and we are now on the down side of the slope but we were still getting $1.20 or $1.30 for our 5-weight calves during BSE.

The wreck that is predictable and is coming in a few years will see those calves getting 80 to 85 cents. And, yes, there will still be cattle producers around, they just won't be the same guys who are buying breds right now for $1,500 or keeping their heifers back to breed.

It's not that there won't be cattle produced in this country. If you set the price low enough, other people will see opportunity where the people who bought too high see loss and the new people will jump in.

kpb

[smcgrath76]

A couple of thoughts...
Packer margins may be 1-3% (I doubt it but maybe). Don't fool yourself that these packers only kill, cut and box beef though. These companies are called Cargill "FOODS" and Tyson "FOODS" for a reason. The low margins in packing are made up for in the further processing, retailing end of the business for sure.
Is a $200 difference fair? Definitely not, but it is a reality of the day. Producers are not in the food business where the real money is being made. The $200 is just a nice extra bonus to these companies.

[wd40]

OK OK - I posted earlier that "Every time a packer opens his mouth - just call him a liar."
1) YOU WILL NOT GET THE REAL GOODS FROM THE PACKER ON MARGINS -PEOPLE GET IT THROUGH YOUR HEADS. THE REAL MARGINS AR CLOSER TO 30%. I worked along side a former CEO of IBP who informed me that their historic margins while he was at the helm of one plant and worked under the arm pit of Bob Peterson were never under 30%.

So go get a life and quite feeling sorry for your packers. To do so is the same as "beaten wife syndrom" you hate the beating but your in love with the old man and keep comming back for more.

stupid

[gwf]

I don’t know if you remember the times when Canada Packers and Swifts were the big players of the day. I remember CP used to advertise that they worked with a margin of 1 or 2 %. The irony was that they did it every week with the same dollar. That maybe wasn’t enough to keep them going.

[cowman]

Well I wasn't feeling sorry for the packers! They are in business and obviously have managed to make a profit that is acceptable to them, whether it is 1% or 30%?
BSE was a wreck, but I don't think we ever got down to 80 cent calves or at least I sure never did! And don't forget everything else has gone up since 2003 and probably won't be coming back down? I sincerely doubt we'll have deflation by 2008?
Can you make an acceptable rate of return with 80 cent calves? I don't think I can...hell I don't think I'm getting enough at $1.30! Maybe I need to get some of these super duper funny cows some of these old boys push on here that don't eat and just put money in the bank?
Maybe this will be all academic by 2008? When the coalbed boys are punching in 5500 wells a year and due to increase...maybe we will just be farming well heads and living off the lease money? Maybe we can rent our cows out for vegetation control to the gas companies!

[farmers_son]

Cowman: I would question whether you ever earned an acceptable rate of return on raising calves, if so only once in twenty years.

Maybe you did not ship 80 cent calves but the feedlots went for extended periods not able to ship anything and suddenly found they were holding a new class of animal called OTM which did sell for below 80 cents. Cows were a wreck and still are for that matter.

I guess for some the answer to diminishing farm gate returns will be hope and pray that you get a well. Really this is what is called magical thinking. Yes some people will find a drilling rig on their property in the next few years but many will not and for those that do the amount received per well is really not that much when everything is considered. In any event it is beyond your control. Whether at the government level or the producer level proposing that surface lease revenue is the solution for diminishing farm gate returns is unacceptable.

A weak Canadian dollar hid some basic harsh realities of our cattle industry for quite a few years. As the dollar strengthens we will again have to face the truth.
We have some fundamental problems in this country regarding the raising of live cattle. Key among those problems is a lack of competition between the two major packers and uncertain access for our live cattle across international borders.

Smcgrath76, the $200 cash to cash spread may be more than the reality of the day. A negative cash to cash spread will remain our fate as long as we do not have sufficient capacity to slaughter all our production within our own borders and as long as we do not have competition between the slaughter plants we do have. Yes the real profits are in the branding and value adding beyond the actual slaughter and packing of the live animal. And that is where producers have some real competitive advantages over Cargill and Tyson.

[smcgrath76]

I'm inclined to agree with you on this one FS.
The bad thing about the $ increasing (which is part of why I am thinking calves will be in the 80's) is the effect it has on cash prices. That said, a high $ may also promote investment in infrastructure (such as packing plants), as long as purchasing power can keep pace with inflation.
I currently think that packing capacity could more readily be added in SK/MB than AB due simply to the economics of construction in AB.
When the border opened these new plant proposals seemed to have any wind sucked right out of them, but poor calf prices may improve the mood of producers towards investing in value added. It seems in my experience that we never want to work together when we can afford to do things, but rather when we have no money left.

[cowman]

Now I can agree you boys might be right...down the road...only history will show if you were right?
Myself I deal with tommorrow...lately I've had a bit of a wakeup call on mortality!
You know I really don't see this "canadian packing" thing as much of a reality? Sorry, but I just don't see it happening? Maybe I need some rose colored glasses or something?
Boys...I just don't think it is going to happen? Pessimist that I am.