Meat Price Mania

The Canadian retail prices for meat have entered a mania phase.  How will Canadians react when more and more of us are forced to become vegetarians by unaffordable meat prices?

Figure 1:  Canadian Retail Prices of Meat, Sept. 2014.  Prime Rib roast of beef
is 277% higher than chicken.  How do they justify these pricing
differential?

Figure 1 shows data from Statistics Canada on the retail price of meat in Sept. 2014.  Click on the graph for a bigger version.  As expected, prime rib of beef is the most expensive.  I am pleased to see chicken is still the cheapest on a $/kg basis.

Note that prime rib is 277% more expensive than chicken.

CAFO (Concentrated Animal Feed Operation) has the biggest market share for beef, is usually the cheapest method of producing beef, and has an FCR (Feed Conversion Ratio) of around 5, while Ontario chicken has an FCR of around 1.72.  If all other factors are similar, the cost of feed is the biggest factor in determining the price of meat.  Therefore beef should  be 290% higher priced than chicken, but is actually just 277% higher.  Does this mean that beef is 4.7% too expensive, or chicken is 4.7% cheaper than it should be, or a combination of the two?

I think it's safe to assume that the prices are reasonably close to the correct ratio; but both beef and chicken need to be deflating in price, not inflating.

Figure 2:  Trends in Canadian meat prices for 2010 to 2014.  Stewing beef wins the race towards
unaffordability with a 9.9%/yr increase, doubling and re-doubling every 7 years, with a total increase of 52.3%
in price from 2010 to 2014.  Chicken is up 3.79% per year, doubling every 18 years, with a total increase of
16.1% from 2010 to 2014.

Figure 2 above shows the trends in Canadian meat prices for 2010 to 2014.  Stewing beef wins the race towards unaffordability with a 9.9%/yr increase, doubling and re-doubling every 7 years, with a total increase of 52.3% in price from 2010 to 2014.  Chicken prices are up 3.79% per year, doubling every 18 years, with a total increase of 16.1% from 2010 to 2014.

I wish to congratulate the Canadian chicken industry for resisting the natural urge to jack up prices like the other meat industries did in 2013-2014.

See, I can offer the #ChickenMafia a heart-felt complement when they deserve it.

It is interesting that, except for chicken, the cheapest meat cuts have the highest rate of price inflation.  As meat prices go up, more and more people will naturally gravitate towards the cheaper cuts of meat.  As stewing beef flies off the store shelves, the available supply of stewing beef  drops.  Stewing beef is usually the trims cut off the higher priced cuts of beef during the butchering process.  When that is all gone, butchers can start cutting up prime cuts of meat to make stewing beef (highly unlikely), or sell out and have a bare meat counter with no stewing beef for sale, or they can raise the price of stewing beef to balance supply & demand. 

Beef and pork were both suffering severe struggles on the farm in 2013-2014 due to the PED virus for pork, and the severe US drought in Texas and California.  Are these being used as excuses (or are just and reasonable reasons) for these extreme price increases?  Even weiners, mostly made from pork and chicken, jumped on the price inflation bandwagon in 2014.

However, chicken resisted the price inflation trend set by everybody else.

Did this Blog and its whiny voice have any influence in the #ChickenMafia's decision?  I doubt that.

It appears that the #ChickenMafia has determined that flying below the radar is in their long term best interest.  Large price swings tend to incur the attention and anger of the public, and that is when Supply Management might add the straw that breaks the back of SM's camel.

Instead, #ChickenMafia continues their policy of a "steady as she goes" inflation of 3.79% year over year, like clockwork.  Let the sleeping public stay asleep.  It appears the #ChickenMafia's strategy is working pretty well for them.

Hopefully, Supply Management can be changed so that the #ChickenMafia have a "steady as she goes" price reduction each and every year, requiring them to work very hard each year to find more and more methods to improve their efficiency and productivity, thereby lowering prices like clockwork.

In that way, the #ChickenMafia become excellent stewards for the public, using their government created monopoly to serve both stakeholders (ie. themselves, as well as the greater good of the public).

The SM Price Penalty

An anonymous poster on Better Farming proposes that Canadian food prices for Supply Management ("SM") foods must increase even more and faster so as to ensure production quantities increase so as to feed the growing population.

As you might expect, I have a different opinion.  That's the basis of today's Blog posting

The Law of Supply & Demand would tend to match demand to supply by price adjustments.  Also, we tend to use the best resource first (ie.  increasing demand will bring less productive farms, farmers, and land into production once all the best resources are fully occupied; see Best First Principle).  Less productive resources will tend to require higher prices to keep them engaged.  On the basis of just these two isolated factors, this wayward anonymous poster with their many simplifying assumptions is partially right.

However, there is the possibility of productivity improvements.

For example, I bought an Apple II+ computer in 1979 for about $2,500.00 which was an 8 bit 6502 processor running at 1 MHz with 48 kB of RAM memory and no hard drive, and one 5 1/4" floppy drive, and only rudimentary software.  It cost me more than 2 months salary at that time.  I was determined to join the digital age, and paid a huge price to do so.

Apple II+ computer with dual floppy drives and monitor
purchased for $2,500 in 1978

A few months ago, I bought a new notebook computer with a 64 bit Intel i5 processor with 2 cores and 4 threads running at 1.8 GHz, 4 MB of ram, 0.5 Terrabyte hard drive, loaded with MS Office professional software etc., for $750.00  This computer is about 4,000 times more powerful than the Apple II+ of the 1970's.

The Consumer Price Index ("CPI") was ~35 in 1978 and is ~125 today.  That means the $2,500.00 Apple II+ in 1977 is equivalent to $8,928 today (ie. 125/35*$2,500= $8,928).  If we assume today's notebook is 4,000 faster & better than the Apple II+ based on the microprocessor speed, cores and threads, then the equivalent price for today's notebook is $35.72 Million if we use hedonics (see http://en.wikipedia.org/wiki/Hedonic_index ) to compare computers of equivalent power (apples vs. apples, not apples vs. oranges).

How is it that I bought the new notebook for $750 rather than the equivalent Apple II+ price in 2014 of $35.72 Million?

From 1978 to 2014 is 36 years.  Assuming a steady rate of CPI inflation over these 36 years, the equivalent Apple II+ computer price would have inflated by 30.44% per year.  However, it actually deflated by 3.4% per year.  This price differential  is because of competition and continuous improvement in the computer industry.

Throughout those 36 years from 1978 to 2014, the computer industry faced inflating expectations from raw material suppliers, staff wages, energy, taxes, changing technology and re-investment, and everything else.  The various computer companies either improved their operation, or were subject to dying an early death.  Apple Computers almost went bankrupt due to numerous mistakes and loss of focus.  Many other computer suppliers were unwilling or unable to compete, so they went out of business.

Unfortunately, Canada's Supply Management system for chicken, eggs, turkey, & dairy doesn't have to improve, nor compete.  They get to charge whatever they like, regularly putting through price increases; price increases for themselves, or by enabling their SM coattail riding "friends" to do so.  Canadian consumers are forced to pay these price increases for SM foods.  As the rest of the world improves, and suppliers and raw materials increase their prices, SM margins get squeezed, so SM puts through another price increase to Canadian consumers so that SM players are insulated and protected.

SM always protects itself, but who insulates and protects Canadian consumers?  Nobody! Canadians pay and pay again for SM's growing inefficiencies.

For example, Ontario's FCR (Feed Conversion Ratio) is 1.72 but Tegel Poultry in New Zealand has an FCR of just 1.38 or lower (see http://www.wattagnet.com/154106.html ); 24.6% better than Ontario.

If SM were to change their focus today, it might take them 2 decades to regain the competitive ground they have lost to the rest of the world during SM's ineffective reign.

Until SM changes their ineffective system, Canadians are forced to slowly sink in the SM swamp, unable to be rescued from their terrible fate.

Glenn Black
Small Flock Poultry Farmers of Canada

Chicken Quota Prices

The data for the chart shown above comes from the Alberta Chicken Producer's Annual Report for 2012.  They provide some interesting data on the cost of buying chicken quota in the Wild Rose Country.

The price of chicken quota has been going up at a consistent rate of 29.5% per year for the last 4 years. That means quota prices double every 2.4 years.

Exponential growth is never sustainable.  For example, the pressure wave created by a stick of dynamite exploding is an exponential increase; and we know how destructive that can be.  It's no different here.  It's only a matter of time.

More recently, as the Alberta economy has started to tank, the quota pricing has dropped from its peak.  Is this the beginning of the end of Supply Management?

There are 235 quota holding chicken producers in Alberta.  They get to produce 3.2 kg of chicken for each unit of quota they hold.  As of Dec. 2012, chicken quota was $166.66 per Quota Unit.  There is a total of 6.05 Million units of outstanding chicken quota, so that has a total capitalized value of $1 Billion.

I wonder why someone would pay that kind of money to be a chicken producer?  It must be a very profitable business to attract that kind of entrance fee.

Chicken Monopoly Pricing

Have you been wondering why your weekly grocery bill keeps going up?

In part, perhaps it's caused by the monopolistic actions of Ontario's marketing boards.

Almost all of Ontario's chicken is produced in mega chicken factories.  These chicken producers, lead by their monopolistic marketing board, the Chicken Farmers of Ontario ("CFO"), must be doing something right.  It is truly amazing how chicken has taken over the Canadian marketplace since 1971 (see CFO`s Chart 4 below).  Unfortunately, it has been at the expense of farmers who raise beef, pork, and turkeys.

Source:   http://www.cfo.on.ca/documents/CFONewsletter-Winter2012.pdf

Typically, whenever an industry is able to increase its total production volume and their market share, this usually means that industry`s fixed overhead costs can be spread over a growing production volume, thus providing lower cost of production, and dropping prices for the consumer.  Unfortunately, Ontario chicken doesn't follow this logical and typical expectation.



Source:   http://www.cfo.on.ca/documents/CFONewsInsight-October292012_000.pdf

In the CFO`s Chat 1 shown above, the "A-80" to "A-114" scale on this graph refers to each chicken production cycle.  A chicken production cycle starts with the filling of the chicken factory with day-old chicks, then raising them to market weight over the next 8 weeks, then collecting the full-grown chickens and shipping them off to the slaughter plants).  Cycle A114 occurred in the Fall of 2012.

As you can see from CFO's own data, the cost of chicken on a $/kg basis has been steadily rising.  CFO says that the major factor that controls the price of chicken is the cost of the feed that the producers need to feed those chickens.  Note that the cost of chicken closely tracks the cost of the feed that the mega-factory chicken producers pay for the feeding of those chickens.

However, take a closer look.  Note that the two lines get closer and closer together as we go forward in time.  CFO drew this graph so that feed prices is above the chicken prices, perhaps to disguise the fact that their profit margin is rising.  That means that the price of chicken is slowly, ever so carefully controlled by CFO, is going up faster than the price of feed.  CFO sets the selling price for all chicken in Ontario.  It seems that CFO has applied the "boiling frog" methodology to maximize their market share of the meat market, and consumer acceptance of those rising chicken prices.   This data suggests that chicken producers aren't getting any more efficient, they just pass on their rising production costs to the consumer, and then add on top even more profit for themselves.

CFO summarizes Stats Canada statistics in http://www.cfo.on.ca/documents/CFONewsletter-Winter2012.pdf as follows:

• Over the last 9 years, consumers have suffered a retail price increase of 38% for fresh chicken.  In spite of this price increase (or because of it), consumers spent 5.9% more of their weekly grocery money on chicken in 2012, as compared to 2011.  In spite of this ever rising price increase, chicken sales in 2011 were also up by 4.3% over 2010.    (Ref:   op. cit.)

• Compare chicken to the cost of other fresh meat in Ontario`s stores.  Chicken prices have risen far faster than the price of beef , pork, or turkey.

• Chicken has the biggest share of the fresh meat protein market, 33.3% in 2012, so a rise in prices for chicken has a huge effect on the total grocery bill for Canadians.     (Ref:   op. cit.)
  
  
• In spite of Toronto being one of the largest markets for chicken, and being geographically close to CFO's major chicken producers and the major slaughter plants, in 2012 Toronto had to pay a 4.2% premium for fresh whole chicken when compared to the rest of Canada.   (Ref: http://www3.agr.gc.ca/apps/aimis-simia/rp/index-eng.cfm?menupos=1.01.02&REPORT_ID=116&LANG=EN&ACTION=promptReport ).

I wonder why?