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Wednesday, March 13, 2013

Why Not Export Canadian Chicken?

Note:   This posting is expanded from the response I gave for a comment posted in "Bogus FCR takes $945 Million per year from Canadians".

There are many Canadians who believe that US chicken is terrible, as compared to Canadian chicken. I'm not so sure.

In 2011, Canada imported 159 million kg of chicken, most of it from good 'ol USA (74%), followed by Brazil, Thailand, Chili, and Israel.  If the difference between US and Canadian chicken was so great, people would pick the better ones, and leave the rest to rot on the meat counter.

For example, back in the 1970's Sony Trinitron colour TV's were manufactured in both Japan and California, both to the exact same specifications.  While the technical specs were the same, the California TV's had a varying level of quality, while those made in Japan were virtually identical to each other.  The retail stores in N. America tried to sell TV's from both California and Japan, side by side on the showroom floor.  The customers could distinguish the difference, and would only buy the Japanese version. As long as one TV from Japan was available for comparison, no California TV's got sold.

Small Flock Poultry Farmers believe that Canada should be self-sufficient in supplying chicken for ourselves. We also believe that we should be exporting our Canadian chicken everywhere in the world.

Unfortunately, Canada is a very poor chicken exporter. Of the 7 top OECD chicken exporters in the world, Canada exports just 1.42% of the total exports for these 7 countries, putting us in last place for these 7 countries.

What's stopping Canada from being #1? To me, it seems the the chicken processors are quite happy raping the Canadian public, and are so comfortable in the fat profits derived from this, they have no hunger or interest to look farther afield.

This world-market stuff scares a lot of people.  Once you grow the birds, they have to go to slaughter, or you get stuck with having to continue feeding them.  If you slaughter them after losing your customer, the fresh meat has a limited storage life. If you freeze your surplus product, you have to pay on-going storage costs, and it still has a shelf life limit.  If you don't find a replacement customer with 1 to 3 months, CFC (Chicken Farmers of Canada) will fine you for failing to export per your export license.   Since prospective buyers know all this, and can use it to their advantage, this enables them to back the farmer and/or processor into a corner, refusing to buy unless they drop their price.

This is the same as in the auto industry when we compare GM to Toyota.  GM is notorious for "channel stuffing".  GM has no confirmed sales, but they make the cars anyway, then twist the arms of their dealers to buy the cars, pay interest on the money they borrow to buy the cars, so that the unwanted cars sit on the dealers' lots while they slowly rust.  At the end of the year, it's a fire sale to get rid of the cars.

Alternatively, Toyota only makes a car when a dealership has ordered that car, usually for a specific customer, and then makes the car exactly as the customer has ordered.  No arm twisting required.  No channel stuffing.

For chicken, we can learn from Toyota.  Chicks are ordered only when a confirmed export order for a specific customer has been received, and that customer has provided an irrevocable letter of credit from your friendly neighbourhood bankster.  In this way, when the birds are ready 8 weeks later, whether the customer takes them or not, payment to the farmer is guaranteed by the bank.  That way, the exporter is always protected.  If there are no export orders, then you don't order chicks, or you do some domestic production.

WTO (World Trade Organization) rules forbid a country to do predatory dumping of any product in a foreign market.  That is usually defined as selling the product for a lower price than what is charged domestically.  Since Canada has the world's highest domestic prices for chicken, there isn't one country in the world that Canada can ship to without being subject to a charge of predatory dumping of chicken, illegal under WTO rules.  If Canadians were allowed to purchase chicken at the world price (about half of today's prices in Canada), we could ship to every country in the world without a worry of be accused of dumping.

For another example, look at Canadian wines.  With few exceptions, Canada historically produced only garbage wines (ie. Baby Duck).  However, Canada quickly went from one of the worst to one of the best for our Canadian wine industry after we signed the Free Trade deal with the US.  We were forced to, and the wine industry responded. I believe we can do the same for chicken, if given half a chance.

In 2011, Canada exported 123.4 Million kg of chicken, about 12% of the kg of domestic chicken production; in other words, a paltry after thought.  I believe we can do far better than that.  Why can't Canada grab 50% of the world's export markets?  That would be 4.43 Billion kg of eviscerated chicken exported per year, a little more than what Brazil did in 2011.  If Brazil can do it, why not Canada?  If Canadians consumed 1.07 Billion kg., and we exported 4.43 Billion kg, then Canadian farmers would have to produce a total of 5.5 Billion kg., which is 5.4 times more chicken than what Canada currently produces.  Either we get 5,400 more people to become quota-bearing chicken farmers, or all the current farmers are given 5.4 times the quota they currently have, or some combination in between.  What's wrong with that?
 
Transitioning from our current supply management system towards something better will not be easy.  The Canadian Supply Management System has allowed us to be "fat dumb & happy" for a very long time.  Compared to other countries, Canadian farmers and processors have lost our competitive edge long ago.  For example, New Zealand chicken farmers have a FCR (Feed Conversion Ratio) as low as 1.38 while Ontario chicken farmers have an FCR around 1.82 which is 31.9% worse than world-class.  Since feed costs are about 60% of the total live chicken price, the poor Canadian FCR raises our live bird price by 19.14%.  No wonder Canadian prices are so high.

It takes years, if not decades to get an FCR optimized to be the best in the world.  I have reservations about going down this road due to the impact on the bird's health, and the resulting nutrition level of the meat coming from an "optimized" chicken, but that is what has been going on in the rest of the world.

What would happen if we threw in the towel for chicken supply management?  The rest of the world did that decades ago.  Canada is the only country in the world with a supply management system.  Exactly what do we think Canadians know that the rest of the world is clueless about, so as to explain that we are the only ones left with a Supply Management system?

When New Zealand gave up supply management for their dairy business, they were a insignificant speck on the world's dairy scene. It took 6 long years to rebuild their dairy industry.  Curing their "fat dumb happy" slovenly habits wasn't easy.  Decades of neglect came home to roost in a very short transition period of just 6 years.  After that 6 years in purgatory, the New Zealand dairy industry took off, and is now the #1 dairy product exporter in the world. They learned their lessons the hard way.

Of course, New Zealanders now pay world prices for dairy products, rather than the government tax subsidized prices previously enjoyed. Don't be fooled, for what citizens saved in their left-hand pocket, was pick pocketed out of their right-hand pocket, plus a little extra.  I would suggest that every time any government touches something, they add a significant overhead cost. For a government to tax the public, then send some of those tax dollars back to the dairy industry to subsidize the cost of dairy products, this government bureaucracy adds additional costs above what would be the world-priced products.

When governments use general tax revenues to subsidize dairy products, everybody pays, even those who hate dairy, or are allergic to dairy.  How could that be fair?  Isn't "User Pay" better and more fair?  While I don't have the stats to prove it, it is suggested that the subsidized dairy price previously paid by consumers plus the per capita tax burden required to generate the government subsidy would exceed the non-subsidized dairy prices that are paid on the world markets.

Since the end of New Zealand supply management for dairy, there has been significant consolidations of the New Zealand dairy industry. That is usually not good. In a stable competitive market, there are usually only 3 significant competitors. I suggest that governments must prevent excess consolidation (ie. mergers and acquisitions) by anti-monopoly (anti-trust) legislation such as Canada's Competition Act.

Canada first passed their anti-trust legislation in 1889, one year before the US passed the Sherman Act, the US equivalent. See  a summary of Canada's Competition Act for more info.

We initially learned back in the 1600's that monopolies are bad policy, and need to be avoided like the plague. Unfortunately, sometimes we forget this, and have to re-learn our lessons, just like the current Supply Management System issues we face today.

2 comments:

  1. ok but getting rid of SM and becoming a major exporter like New Zealand doesnt help the consumer. The consumer in New Zealand pays the same price as a Canadian for milk. Consumer prices dont go down if SM is gone, plus the government will have to bail out farmers, change legislation and cost the taxpayer billions of dollars for no apparent change in price in the end, but we can export - and get CRUSHED by much larger countries who are already established - Brazil, US for example.

    ReplyDelete
    Replies
    1. Cost of chicken is chick + feed + overhead + slaughter + transportation. Refrigerated transport is expensive, especially 14 days at sea. In contrast, it is only 48 hrs and 4,400 km to send a truck from Toronto to Vancouver. If each Province across Canada is doing their own thing, transportation is minimized.

      If Canada is the biggest and the best chicken producer, we become the point on the planet with the lowest cost of chicken. If Canadian producers choose to no longer share those savings with their Canadian customers, then other international suppliers will be quick to fill in with low cost chicken if we had no Supply Management.

      Right now, if we were to remove restrictions to the importation of chicken, we'd be crushed, so we agree. We need to dramatically improve so we become equal or better than the best in the world.

      The Canadian chicken industry could have chosen to take that path 50 years ago. Unfortunately, they chose a different path. What would suddenly cause them to see the error of their ways? To me, that will only occur if consumers force the industry to change, or the government changes the current rules, forcing them to change.

      To me, the sooner that either of these occurs, the better for Canada, and Canada's chicken industry.

      Delete

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