TRADE

[STOUT]

November 5, 2004
Canadian cattlemen cheer Bush’s victory

Canadian cattlemen like Stan Eby cheered President Bush’s Tuesday re-election.

Eby, president of the Canadian Cattlemen’s Association, believes that with more free-trade-friendly Republicans now in control of the House and Senate, the U.S. will move quickly to reopen its borders to Canadian cattle.

“We feel quite optimistic that in the very near future we will have trade resumed. The last few months everything has kind of come to a standstill…because of the election. It is now time to move forward,” he said.

Eby and representatives of Canada’s meat-packing industry will be in Washington next Tuesday to being a new round of lobbying to reopen the border.

Since the border was closed in May 2003, Canada’s beef industry has lost more than $4 billion. While exports of beef from younger cattle have resumed, live cattle and meat from older animals remains embargoed.

Cattlemen like Trevor McCrea hope industry leaders and the Canadian government have learned a lesson about the perils of integrating Canada’s beef sector so closely with the U.S. McCrea owns the farm where the Canadian cow with BSE was born.

“Bush was our best option. But I guess I’m of the attitude that when (the border) opens, it opens,” McCrea said.

November 5, 2004

[cowman]

I wonder if the government or industry leaders have learned anything about the perils of relying on one market? Doesn't seem to me they've done very much to change that...or am I wrong?
Seems to me they basically still believe if the border opens, just about all of our problems are solved? Seems to me they think the best solution is for Cargill/IBP Canada to expand slaughter capacity? Have they passed any laws or resolutions to restrict those two big players from controlling the cattle market in Canada? Have they really encouraged Canadians to get into the packing business?
Perhaps they have learned that they need to strengthen their ties to the US government and the American cattle organizations/packers so that we don't have these glitches? I really don't see the Canadian government or the CCA or the ABP coming out and supporting anything but the resumption of the North American cattle trade, except in a very slight way? Sort of like...Oh Yes we need to pursue other markets! We'll saddle up old Ted again and send him over to Asia, sort of thing?

[farmers_son]

Cowman, your comments are correct but you are confusing the trade issue by lumping in live cattle trade with beef trade. After May 20 we only lost our export markets for beef temporarily, by September 2003 beef was being exported. In the period of time between May and September all the countries of the world blocked our beef. We could have been exporting beef to 50 countries, all those markets would have been lost. Since September 2003 we have been shipping record amounts of beef to the worlds largest market, the U.S. and also Mexico, some other countries as well, Macau comes to mind. In fact we are in line to be the world's third largest exporter of beef in 2004, only one year after finding a case of BSE. That is a feat that is nothing less than miraculous, certainly something that has never been accomplished anywhere else in the world.
That highlights the real problem, Canada's dependency upon live cattle trade across international borders and the resulting lack of domestic packing capacity. We are not considering sending Haney to Japan or South Korea to open new markets to live cattle. We will only ever have one major export market for live cattle which is of course the U.S. The scales have fallen from our eyes and a lot of people are seeing the folly in shipping volumes of live cattle across international borders whether that border is the U.S. or Japan, Mexico or any of the potential export markets.
The problem was not so much dependency upon one market for beef exports, it was dependency on shipping live cattle to a foreign market to provide needed competition to the two major packers operating in Canada. Yes the solution is more packing capacity but only if that packing capacity provides competition within our market place. Expanding Cargill and Tyson Foods effectively achieves nothing to provide increased competition. I would say all of the proposed producer packing plants intend to fly below the radar of the big 2 and not compete in the marketplace for fat supplies. Even if Canada was to develop markets for beef across the world, if we as producers remain dependent on the live cattle market and do not have competition for fat calves the problem will remain.

I see two solutions. Remain dependent upon the U.S. for a reduced volume of live cattle trade by increasing Canadian packing capacity to 90% of production. This solution carries the resulting risks of that trade being disrupted again in the future, almost a certainty. International live cattle trade is very vulnerable. We would remain dependent upon a foreign country to provide competition for live cattle in our marketplace.
The second and best solution is for producers to vertically integrate further up the supply chain and bypass the nonfunctioning commodity live cattle market. The market for beef is more stable than the market for live cattle and is less vulnerable to trade disruptions. That is already happening but needs to happen on a much larger scale. I see the need for live cattle markets will be a thing of the past within 15 years as the industry realizes it is a non functioning, manipulated and artificial pricing mechanism that does not work to provide a fair return for the primary producer. This may seem far fetched but Cargill and Tyson could be pushed out of the marketplace if the fat cattle market that they depend upon to steal the producers cattle collapses as a result of the price fixing, market manipulation and lack of competition that has been the hall mark of the industry for as long as I can remember.
So the problem is not one export market, it is a dependency on one export market for live cattle trade. The solution is not increased packing capacity but access to packing capacity for producers so they can reduce or eliminate the need to sell cattle into a live cattle market that does not have competition.

[boone]

farmers_son, who is going to ask the question? Will local 250 head per day plants ever be really viable as a price establishment vehicle? And next if not, who is going to break it to all these REGIONAL economic development agents, that they may have to meet and decide what is viable for the industry long term and where to place the limited capital available?

[rusty1]

Farmes_son: Please send me an email at beef@cowboylogic.biz
I would like to talk to you about the plan for Northwest Cattlemen's Alliance

[grassfarmer]

Excellent posts farmers_son and Boone, if only we could get this viewpoint across to those in power.

[farmers_son]

Boone: If I understand your question I would reply that the 250 head a day plant or any producer packing plant has no interest in being a (live) price establishment vehicle. The live fat cattle price is a noose around the producers neck that forces the producer to play Russian Roulette with the big 2 packers who may or may not trip the trap door on a given market day. If the producer were to own the packing plant he can throw off the big packers noose as his price is determined by his own plants ability to add value and create brands that capture premiums that flow directly back to the producer. These 250 a head day plants may not create competition for the big 2 but they create alternatives for the producer who can then choose not to play Russian Roulette with the big 2. The real challenge for producers is to get over the mind set of the live fat price. The live fat price is not a game we really want to be playing. The real benefit of a producer packing plant may well be the equity of the brands it develops rather than a per head return at the point of sale.

[boone]

farmers_son: I commend you on your approach of the moral highground and I certainly understand the branding angle. But please don't set up yourselves, to be undermined before you get off the ground, it would be a terrible loss for all involved. Furthermore it is important to pursue lenders that have an interest in your collective success. This leaves out most if not all of the big five banks. (And I don't give a s__t what the ad in the Country Guide says. They are way to close to big cattle. I wish everyone involved, nothing but positive results, but create your own luck in this venture. Build alliances that will win for everyone as best you can. Good luck to ya!

[kpb]

farmers_son, thanks for your two thought-provoking threads. I'm not sure I fully understand your points but I would like to respond to your last thread where you seem to indicate that the new producer-owned plants will be able to establish alternatives to the multi's by their ability to brand their beef in such a way as to receive a premium from the consumer.
I disagree with this and think it is potentially fatal for our new plants to think this way. ALL of the new plants think they can fly "under the radar" of Cargill and Tyson and thereby establish their own brands and receive a premium for their product that will enable them to compete. This is, in my view, flawed thinking.
I would bring your attention to the fact that we used to have a domestic packing industry that was destroyed by these multi's. I know people that used to be involved in our old packing plants and these are not dumb or naive individuals--they did everything in their power to survive and could not compete.
Also we must not assume that the multi's will just let all these little domestic plants thrive at their expense. The people running these multi's are not dumb--they know more about the Canadian industry than anyone and I can assure you that no one will fly below their radar. They will be super competitive, as they always have, on every level. If a Canadian beef brand is established, they will also have one and it will be cheaper to the consumer.
Lastly I have seen no indication that either the consumer or the producer is willing to make decisions that are not to their advantage from a price point of view. In other words the consumer will buy the cheapest beef of the best quality he can afford regardless of how it is branded or presented. And the producer will sell to the highest bidder regardless of whether that bidder is Cargill or local packers. There is no evidence that I have seen that supports an alternate hypothesis.
I wish the new plants the best of luck but, as I have said before, without government support and shelter I do not believe they can survive. They did not in the past and I see no reason to think they can now. I would also like to point out that these new plants are continuing to run into huge problems in attracting any sort of investment dollars into them. That indicates to me that "smart" money outside the industry wants no part of the high-risk, small-reward, inherent in these plants as they now stand.

[grassfarmer]

From my personal perspective overlooking potential niche markets is a mistake. I have entered into the business of direct marketing grass-fed beef and there are people who perceive our product to be worth more money than commodity beef. If you look at the history of the grass movement in the US this indicates to me there may be huge potential in this market. I read the other day of a guy in Vermont selling grassfed beef for US$5 a pound dressed carcase weight. Most people doing this in Canada are custom killing through small provincial plants but why shouldn't a new slaughter plant set out to supply this growing market?
I see plenty opportunity to compete with the big boys - they are not geared up to do this kind of specialist product. What could be better than small provincial plants killing for a local, high price, high quality market?

[cakadu]

There have been some really good points made on both sides of the argument in terms of whether to fly below the radar or go all out.

I would have to agree with grassfarmer that flying below the radar is more promising because the bigger plants are geared to deal with commodity beef only and are not able to switch gears fast enough to allow for changing consumer demands or niche markets.

I wonder if the demise of the domestic plants was in part due to the fact that the leadership that existed at that time was more interested in bringing in the multi-nationals and did what they could to give them preferential treatment here.
I wonder what would have happened had the leadership done what they could to protect the domestic plants? Problem is that you can't go back and change anything and coulda, woulda, shoulda gets you no where.

There are a couple of examples in the US in the pork industry of smaller plants that are very successful because they are flying under the radar of the big companies and are able to deliver products that the Smithfield Foods of the world are unable to deliver.

As an aside, what is absolutely mind-boggling is that in southern Alberta, something like 60 to 80% of what is manufactured down there is owned by US companies i.e. Lamb Weston, Frito Lay/Hostess and of course the meat packing plants.

[cowman]

Cargill/IBP are always getting ripped on here because of how they have used the border for their benifit. Would anyone feel better if it was Canada Packers, Or Burns or Intercon doing the screwing? In other words if they weren't an American company but a good old true blue Canadian one?
The above mentioned Canadian companys were no angels! They used all the dirty tricks that Cargill/IBP do! I believe if you check out the head of the American Meat Institute(Bill Buckner) you will find out he is a Canadian? Manager of Red Deer Canada Packers, before he took over at Cargill! A pretty good guy and a real good hockey player!
Why do we get so upset that Americans own most of our agricultural processing? They own just about everything up here anyway, from our oil companies, to our retail stores, even our restaurant chains!
It really is time to start to realize we are one country and start to work at getting rid of that border?

[farmers_son]

Kgb: If I may reply...You said "the consumer will buy the cheapest beef of the best quality he can afford regardless of how it is branded or presented". Obviously that is a misrepresentation. If branding offered no advantages in terms of market demand, whether retail price or volume, then no one would do it. Cargill and Tyson are investing in brands because that is where the profit is. If we wish to capture some of that profit we need to do the same because it is folly to believe the packers are going to pass on any of that extra profit to producers.

I certainly agree with you when you say the people in the packing industry were not naive or dumb. Canada Packers did not disappear. See history of Canada Packers at http://www.mapleleaf.com/aboutus/OurHistory.aspx
Canada Packers amalgamated with Maple Leaf and now focuses on branded food products under the divisions Maple Leaf Consumer Foods, Maple Leaf Pork, Maple Leaf Poultry, Maple Leaf Foods International. As well the Maple Leaf Group has integrated down through its divisions Shurgain, Landmark Feeds, Elite Swine and Rothsay Rendering.

One has only to look at the Alberta Beef promotions with the RancHers to see the power of a brand that producers could develop. Cargill and Tyson cannot even touch that kind of image.

Your comments on cheaper have no basis in fact. There is no relation between the retail price of beef and the producer price. Just look at the price of beef in the stores and stop by the auction. No relation.

You mention government support. I think it goes without saying that government support is needed. And I am not talking handouts or government dollars. I am talking about incentives for producers to invest in value added possibly through write-offs or tax deductions on value added investment. Something along the lines of a LSVCC that are available in some provinces only in Alberta tailored for agriculture. See lines 413 and 414 of your tax return. A producers investment in a value added cooperative or corporation should qualify for contribution to their RRSP if it doesn’t already. What about supplementary permits? There is room for the federal government to insist that importers really do have to go to local sources of cow beef, for instance a producer owned packing plant, before importing non-NAFTA beef into this country. There are countless other ways that government could create an environment that was supportive of a producer value added venture. Bottom line the government needs to establish policies that genuinely encourage opportunities for producers to integrate further up the value chain.

Of course there is freedom of choice. If you see your future is selling live cattle to Cargill and Tyson then more power to you. I for one know believe that is a certain path to an end that will see these corporations totally dominating the producer who will be little more than a employee for the mulitnationals. Or you can invest in your future and take a chance. Maybe it won’t work but it is for darn certain that none of us would loose any more than the packers have stolen from us since May 20. But I say there is a reasonable opportunity for success, it is worth a go. The choice is up to each of us.

[cakadu]

Cowman, isn't XL doing just that right now? Yet, it seems to be okay because they are just following the lead of the other 2. I have yet to figure that one out.

[nerves]

When I read these threads it is always the same idea build a plant the bigger the better. What if some ranchers got together and set up a meat shop in an urban center. Take your cattle to your local slaughter plant for slaughter then take the carcass to your meat shop for ageing and processing. The big expence is in the processing right now it can cost up to 500 bucks for a basic cut and wrap, and your kill fee is a small percentage of that. When people invest in large plants you are putting your trust in the hands of people that are investers. If thease plants go broke how much will you get back. I believe there is more value if you own a piece of the actual business not just shares. We still have alot of offshore beef coming into this country this would be the best solution to shrink the tonnage down. What do the rest of you think?