Fact or rumour?

[rsomer]

ValueChainFX: re sharpening our pencils and revisiting our strategies, Premium Brands, formerly Fletchers Fine Foods http://biz.yahoo.com/ic/52/52767.html has in response to the Canada’s BSE crisis shifted production of some products to the United States and reformulated other products. The company has lowered its 2003 earnings to approximately $20 million down from $24 million. See http://www.cbc.ca/stories/2003/08/05/premium_030805

This is an example of some strategies the real players in the beef industry are pursuing. When you say "take our own Canadian markets from under our noses" it sounds as if these markets belong to the Canadian cattleman, or as you describe the "more progressive producer". A more plausible scenario is these markets are controlled by the further processors and others such as the distributors down the supply chain from the packing plants (which may or may not be Canadian based)) who own the brands and control the established supply channels to retail. We as producers, even the more progressive producers, serve to fill the resulting derived demand. If a small upstart, for example your more progressive producer, were able to develop a new profitable niche, it is most likely that companies such as Premium Brands would come and, if the upstart competitor was very fortunate, buy them out. More likely the larger, more competitive player will simply take over its niche.

There are not enough niche markets to go around and even our more progressive producers, I presume like yourself, are not going to be able to sharpen their pencils sufficiently to solve the crisis caused by the closure of the U.S. border to Canadian beef.

[ValueChainFX]

rsomer, It is nice to see you following the market place. When you watch the market and you see the way production has been done up until now. A couple of things become very clear.

1.) Someone between the producer and the consumer is making money.
2.) Production is done on a mass scale and therefore must conform to specifications that are easily worked into a mass flow system.
3.) Turnover in this mass production system is high and consistency is hard to achieve and new products are harder for the mass producers to introduce.
4.) The large companies have you the producer ship live animals from all over to them. (Less money to ship a 1000-pound live animal than 500 pounds of meat in a box)
5.) The producer has little or no control over the income they can make from their live animals.
6.) The value added processor has a better opportunity to recieve premium money than most in the supply chain.
7.) Retails are looking for product that the big packers cannot deliver, i.e. organic, natural and retail brand product.
8.) The studies, reports, analysis has indicated that for the producer to make more income from their product they need to reach deeper into the supply chain (value added, partnerships, alliances)
9.) Large packers are unable to meet the demands of trace back, trace forward and small box (small quantity) product the consumer is looking for.
10.) Our Canadian markets that are being supplied by product other than Canadian product are very venerable now, especially given the publicity of late.
11.) A niche market is only a market that appears small and the big guys are not going after. How many of these markets are not being supplied because the big guys can't supply them through their mass machines.
12.) When a producer is getting as little money as they are at the moment, could we not supply the consumer at a price lower than retail yet enough for the producer to make an income.
13.) No one individual, group or company is going to clear this industry challenge we have, but it is a fact, that in Ontario there is a movement for a producer plant, also in Manitoba, Sask., Alberta and BC.

These plants need expertise to run them and put the systems in to meet the demands. It will never open the boarders, or use all the beef in the system today, but in the future I can see it working in the best interest for producers.

Finally, if smaller Federal plants are developed to meet some of the demands in the market, the producer will at least have some more choices. At the moment what choices do they have?

Do we have all the answers, I am sure we don't. Are we doing something? I am sure we are and so are the many producers that are talking to us in Alberta and across Canada. I believe we have enough interest now that it could be said our plan has past the test of scrutiny!

Always open to more input and always open to make the system better though. I do appreciate your input.

[rsomer]

ValueChainFX: Rather than respond point by point, I would state my view that there is tendency amongst producers to see vertical integration as offering a solution to periods of low profits by subsidizing the unprofitable primary production with the generous profits from other levels of the supply chain. This view is incorrect. Vertical integration, up and down the supply chain, has the potential in some cases to increase competitiveness of agriculture and agri-business. But integration won’t fix an unprofitable sector. It can, over a longer term, offer a measure of price stability to primary agriculture when compared to selling production on an open market.

In Alberta’s beef industry, I have looked to the example of Lakeside which owned a large feedlot and packing plant. The owners chose to divest the packing plant and concentrate on the feedlot. I don’t know why they chose this strategy but it’s possible they decided to stick with what they were best at.

During this time of crisis I would expect each sector of the beef supply chain is being challenged economically. Does this present an opportunity for producers to move up the supply chain, maybe or maybe not. Right now I don’t think I would want to be diversified into any sector of the Canadian beef industry. I would point out that either creating a new market niche or moving up the supply chain by starting a new packing plant controlled by producers takes time, years not weeks. Even the worst case scenario has the U.S. border opening in seven years. Lets face it, time is not on our side. I challenge whether a creating a new value chain or other form of vertical integration can save even the progressive beef producer, if for no other reason than there is not enough time.

A political solution will certainly present itself well before there would be time to save the farm with a value chain, probably not by September 1, but sooner rather than later. Something to think about, after the border reopens all value adding sectors of the beef industry from the feedlot on up will have to consider very carefully if they want to continue to operate on this side of the 49th parallel. If the border can be closed like it has you may want to have the portion of the value chain you own on the south side of the border.

[ValueChainFX]

Rsomer You are so right, many producers, government, consultants and the industry in general have looked at vertical integration as a solution.

I may suggest that if we look at ONLY vertical integration (meaning to me a straight linier path through the supply chain) the solution is not there. However, if you view the industry as a supply chain supported at each level by many other supply chains to each component of the main one, you can quickly see the ability to balance out incomes to make the industry sustainable.

Question 1

How many people have been affected by the present challenge?

Question 2

How many of those people would be willing to take a little less profit if it meant they were going to go back to work or supply their product or service to the agriculture industry?

Your comment in regards to subsidizing the unprofitable primary producer with generous profits from other levels of the supply chain, kind of surprised me.

If we don’t have a primary producer we don’t have an industry. If we are subsidizing them (or need to subsidize them) there is something wrong with the market (local or global) and all WTO countries have the ability to protect their producers. Even outside of that if we can’t pay our primary producers for their product we have no industry anyway.

I may suggest that vertical integration in a commodity ONLY market place May increase the competitiveness, but I would also suggest that marketers that do not meet the customer demands in our global market place “will” find themselves on an order desk answering phones. Markets are very fluid and require constant information exchange to make them viable in the long term. They are becoming more and more demanding as they insist the product is ; Food safe, has security, has adequate quality assurance, can be delivered in a consistent manner with a consistent supply, can have a verifiable trace back, proper labeling and I am sure more to come in the very near future. I will agree that vertical integration in the commodity (mass produced whack em and hack em) market is not the way to create stability that is sustainable.

If we look at Cargill they own a lot of their own cattle and use the cattle they have to leverage in the market. How they work their strategy has been based on the Canadian / US trade more than the global commodity market (although that does play a part) and their integration for value added, counter ready and RTE product is working very well for them. But let’s watch as they try to meet some of the more challenging demands being put on them such as trace back in their mass production system!

The economic challenge in the industry today is seen as being totally caused by the BSE crisis. Producers have had a growing challenge for some time now in the industry. Mainly caused by a production based market system. One of our wise forum writers once said you can’ expect to produce your way out of low prices by producing more. We will only see the industry regain a foot hold if we can derive more income from what we are producing.

You asked “Does this present an opportunity for producers to move up the supply chain”? I believe the producer needs to have choices to move deeper into the supply chain or not, based on information that is accurate. If they want to stay in the business they must do something, what alternatives do they have?

You also said “Right now I don’t think I would want to be diversified into any sector of the Canadian beef industry. “ For some they have no choice they are in the industry and have to figure out what they can do.

You are also right when you say it takes time since we have been developing the strategies for several years and are ready to move forward I believe we are much further ahead than most. Again you are right in saying time is not on our side, but the sooner we start the sooner we are in a position to get on with the industry. Some producers will be lost in this crisis (many were on the edge before the crisis hit) some will live through it, but to what end … to be a part of the primary producer group that needs to be subsidized? I think if producers knew this would be their future they would pack it in right now and save the grief.
If anyone believes for one second that a political solution will present itself and allows their future to sit in the hands of the politicians I would question where they have been for the past number of years. We have not seen any REAL assistance for some time. If the ag departments in Canada let 75% of their staff take an extended holiday for a couple of years most guys probably wouldn’t miss them for the first 12 months.

I guess the final point you make about being a Canadian producer or moving to the US my thoughts are many producers make up the CORE of what Canadians are, they still have a strong Canadian Pride, when we look for Canadian patriots I think you will find the real ones working the land and feeding the world. That is what we do.

YIKES … looking back on this it looks so serious! Just for a smile, I was asked how you tell a Canadian from an American as there didn’t seem to be a physical difference.

The answer is we are both the same the Canadian is just an unarmed (north) American with health care!

Thanks for your comments and your opinion we all have to believe in something I just believe …. There is a way out! Maybe not short term solutions but we are on the path to somewhere.

[rsomer]

ValuechainFX: You made a comment I find interesting. For certain our producers are proud Canadians, they have Canadian pride, probably drink Canadian beer and wear a T-shirt that says I A.M. Canadian. They will be very proud of our Canadian beef that is slaughtered in an American owned packing plant. They can take pride in that tasty steak cooking on the barbecue which since May 20 very likely will have come from the U.S. and certainly would be fed this past year with American corn. While dining on their American corn fed steak they can discuss the BSE crisis which was started when an American raising cows in northern Alberta sold a downer cow which very well might have been born and raised in an American herd. I think it is fair to say that each and every one of western Canada’s 33 major feedlots feeds cattle in the United States on a regular basis and before the BSE crisis routinely shipped fat cattle to the U.S. yet they would still be proud Canadians, T-shirt and all. At some point in the distant future the U.S. border will reopen to live cattle shipments. Where would you want to feed those calves, Canada or the United States? Failing some concrete assurances that the border will never be closed to Canadian beef again our large Canadian feedlots will have to consider moving operations south of the border. They can still be proud Canadians, they will just be proud Canadians feeding Canadian calves in the United States. The beef industry is or at least was an integrated North American industry. We can be proud Canadians as our neighbours to the south are proud Americans and still operate within a North American industry. That’s kind of a value chain isn’t it? The cows have to be fed where the grass is, they will remain in Canada. There will be an interim period when the border is open to slaughtered beef but not to live cattle. That period will be very hard for cow calf producers as the feedlots recoup their losses of May 20 from a captive Canadian feeder calf supply, as rodbradshaw pointed out earlier in this thread, but we need to be grateful that someone may be finally buying calves. When the border opens to live shipments, the feedlots will leave. That is how I see it. There is no reason to believe our beef industry will be the same once the border opens, whether it is September 1, 2003 or 2010.

Just to clarify, when I said that producers look to vertical integration, or forming value chains, as a means of subsidizing their unprofitable primary commodity production, I was not referring to government subsidization.

I don’t have a joke to tell but as I write this we are getting a little shower so we are smiling.

[cakadu]

We need to have a little definition clarity here so that we all can be talking about the same thing. From what I understand and know, vertical integration occurs when basically one organization owns all the links from the gate to the plate so to speak i.e. they own the mill that makes the feed that feed the animal that goes to the plant and then on through to the final consumer whether that be foodservice or us in the grocery store.

Essentially a value chain is comprised of generally at least 3 separate arms-length entities so that no one person or organization owns the majority of the chain.

From the various things that Value Chain has said, I think the primary message in what he is saying is shifting from a production focus to one of a market focus, which means that you find out what the customer wants and then find ways to get it for said customer. Generally that entails quality and consistency each and every time the product is purchased.

Value chains were never meant to emanate from a crisis situation, nor be a solution to a crisis and when in the last several years has one segment or another of the beef industry not been in some sort of crisis?

I am all for value chains and wholeheartedly support their evolution and sustainability. The biggest element in a value chain is trust and without that you don't go very far.

Rumors are abounding right now about who is buying and what price they are paying and speculation is running rampant about what it all means. The Japanese and the Americans are meeting as we speak and it will be interesting to see what they come up with in terms of protocol to have beef start moving again.

As far as niche markets go, they are a tricky game to be in because you always have to stay one or two steps ahead of the competition because once you have enough competitors selling similar product, you've once again turned it into a commodity and down goes the price.

How can we differentiate our products to expand our markets and not be so reliant on a single market?

[rsomer]

cakadu: There are multiple definitions of vertical integration which traditionally involved ownership of more than one but not necessarily all of the chain of activities from production of the raw materials to retailing. It is becoming more common to recognize that vertical integration in more than one chain of activity does not need to involve ownership as positive results can be obtained through alliances within the value system. The buzz word Alberta Agriculture uses is "Vertical Alliance" as vertical integration has some unfortunate connotations in agriculture and agri-business. Alliances between organizations can vary in degrees of cooperation and involvement. Alberta’s vision is that the "Vertical Alliance Partners" work and innovate together, discuss issues and trouble shoot problems collectively. I believe it is correct to think of a value chain as vertical integration without ownership of the other business activities required to produce a product through to retail. It works for me, however calling it a "Vertical Alliance" may be more politically correct and has a better spin. A rose by any other name is still a rose.

See: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agp4936#defined

The province uses the term "value chain" when the "vertical alliance includes three or more companies". You mentioned that no one person or organization owns the majority of the chain. My understanding was that no one owned the chain and that the vertical alliance involved cooperation not ownership. If the vertical alliance partners were to own the value chain wouldn’t the resulting organization be vertically integrated in the old fashioned sense?

You are exactly right when you say "Value chains were never meant to emanate from a crisis situation, nor be a solution to a crisis". That is the point I was trying to make.

I am also all for value chains but I do believe many of the successful value chains will eventually need to evolve into a formal ownership arrangement over the long term because of the trust issue and the problem of allocating the benefits of the value chain equitably to the vertical alliance partners. But the value chain concept is useful to get some initiatives started when the vertical alliance partners have limited resources.

You said "How can we differentiate our products to expand our markets and not be so reliant on a single market?" Really, why should we have to? Canada gained preferential access to the American marketplace at the same time the United States gained preferential access to Canadian resources such as oil and gas with the signing of CUSTA. This effectively created a single market in North America where goods and services were to flow freely between both great countries. Now we are being told that Canada needs to look elsewhere to sell our beef. Rather than looking elsewhere for markets we should be looking to NAFTA (CUSTA’s successor) to work. The North American consumer market, including Mexico, is a great, prosperous market that likes our product. With the NAFTA agreement in place the North American market is really the only market Canadian producers should need. There was nothing wrong with selling a primary food commodity like beef into a market like North America when we were actually getting to sell it.

[pandiana]

I am very impressed with the depth of thought and background knowledge expressed in this thread. There is some real ¡¥meat¡¦ one can sink your teeth into.


To restate the obvious, the number one problem encountered by primary producers within the beef industry (as well as all other sectors of commodity production) in a free market system is the lack of leverage in setting prices.

Many solutions that have been most often proposed to solve this problem include the following:
ćWithhold supply
a.Difficult to implement due to time sensitive nature of product
b.Many producers have financial obligations such as land and machinery payments
ćCo-operatives and/or marketing boards
a.Would work if our market was like the dairy industry and restricted to the Canadian market. Complications with NAFTA.

ćVertical integration
a.The primary producer would be in danger of losing control of their production.

b.End up as employees of mega corporations (most likely American)
ćValue chains, niche markets or alliances
a.Involves the producer in networking and marketing, skills for which they may not be suited.
b.Commits only the high end product ; markets still may be required for low end product.

Each of these systems has major shortcomings. Is there a ¡¥one size fits all¡¦ solution?

The BSE crisis has served to exacerbate the underlying problem that has been present in the agriculture sectors world-wide for many years. The primary producer continues to be relentlessly squeezed further from profitability with every increase in fertilizer, fuel, utilities, taxes and so on. All we would need is a significant increase in interest rates to drive home the final nails in the coffin of our industry. Factor into this equation, environment (drought, flood, cold, grasshoppers),disease (FMD, BSE, Johne's, BVD etc) and I am beginning to think the ¡¥progressive¡¦ farmer is the one that finds the first door out of the business.

[ValueChainFX]

Pandiana cakadu rsomer

I guess we are all saying the same thing; part of our challenge today is how information is gathered, stored, interpreted and distributed. No system is without challenges, but each component in the supply chain seems to be having their own unique challenges, either based on their product supply or their customer demands.

Many of the smaller marketers (those outside Cargill and IBP) still have very strong markets they service, grant it most of their product comes from Cargill, or IBP with some flowing through further processors (such as value added processors).

The concept behind these alliances we are seeing develop is that the supply chain can draw together those with expertise in an area of the supply chain, they can then work directly in the supply chain to assist them in meeting the demands of their customers and in turn address some of the challenges they have. It also helps to draw smaller companies together giving them more buying power to reduce costs in some cases, or production power to achieve capacities for cost effective production or coordinate inventories to ensure supply.

Through out the process of putting our plans together the one thing I have heard over and over again is that it is very difficult to reach the primary producer with information. We have found this to be true as well, in the beginning, now we have word of mouth gaining some momentum and several of the key producers are taking it upon themselves to send, faxes and inform people with contacts.

I have often wondered why many of the farms stay in the business and have not found the door out, but I guess they are a tough bunch. So trying to look into the future we just do the best we can and try to find the best way possible to do something positive.

At the end of the day, each producer will do what they feel is right for them. All we can do is offer them choices and try to remain as flexible as we can. I’m sure one system does not have all the answers, but if we are working on a system, why not try to address as many of the issues as you can.

I have found your input to be wonderful thank you all!

[cakadu]

Personally, I think it behooves us to find additional markets for our production to go to, not that Canada is being told to.

With the growth strategy/ag summit/R & D strategy targets at being $20 billion (value-added)/$10 billion (primary production) by 2010, and a 20% increase in beef production, there is going to have to be somewhere for this increase to go. It makes little sense to me to make the increase in production without there being some sort of marketing plan in place prior to it being ready to go. There is no reason why we can't grow if the proper structures are put into place and I am all for increased the money that goes to a producer, however, I would feel much more comfortable with the idea if there was a solid plan in place.

New markets could include producing beef without hormones/anti-microbials so that we can get into markets that we are not already in and cannot gain access to until such time as we get rid of these additives. Does that mean that everyone should do it, no it doesn't; what it does mean that if it fits into your idea of raising beef/how you want to farm, then by all means seek out those markets and I'm sure that there will be ample reward i.e. increased margin for doing so.

What other avenues are available is anyone's guess at this point. We will not be as prudent as we could be if we just continue to do things the way we always have. If you're taking the time to do these extra things, then you should get compensated for it.

This may have tempered the COOL issue on the part of the U.S., but it doesn't alleviate the problem of having all those South American cattle coming on line at some time.

We need to find ways to make our product the first choice of any consumer.