Chicken Pricing: From Bad to Worse

Ontario's farm gate price of live chicken dropped for the last two Quota Periods.  To what do we owe this honour?

Will those savings slowly work their way through the non-competitive Supply Management system and their cronies, eventually arriving at the retail meat counters as more affordable chicken for Ontario consumers?

Figure 1:  CFO's Live Chicken Farm Gate Price, as compared to price of
farm Input Costs (day old chicks and chicken feed)

Don't hold your breath.

Figure 1 at right shows Chicken Farmers of Ontario ("CFO's") data for the cost of live chickens at Ontario farm gates (using left vertical axis), as well as the price of Farm Inputs (500 day-old chicks, and a tonne of chicken feed; both input costs are using the right hand vertical axis).  I used 500 chicks and a tonne of feed so that the cost of feed and chicks was the same price magnitude and could all be graphed together on same graph.

What can we learn?

The price of chicken has dropped by 0.13% on an annual basis during 2014.  Was any of that decrease caused or contributed to by improvements made by Ontario's chicken farmers?

Most businesses and governments are expected to improve on a continuous basis.  Why not CFO and the Chicken Mafia?

Chicken farmers are guaranteed a "reasonable return" on their efforts and investment.  In exchange for that guarantee to chicken farmers, why can't we ask and expect them to continuously improve, just like we expect from everybody else?

Not just any kind of improvements, we want the most important kind of improvements.  We want important improvements that reduce the retail cost of chicken for the people of Ontario.  An improvement of just 0.13%/yr is a trifling, a rounding error.  I doubt it was caused at all, as it could just as well have been an increase.

There is no plan to improve at CFO, in spite of what they may say.

CFO doesn't understand, and even worse, they don't even care.

Farm gate prices are primarily affected by chicken feed prices, and to a much less degree by the chick prices.  I assume the chick prices go up as feed prices do, as the parents of the chicks must be fed chicken feed too.

Therefore there is a compounded effect for rising prices of feed, directly and indirectly through chick prices.

There is another issue that we need to discuss.

Figure 2:  CFO's old system of price fixing

Here is an image of CFO's previous system for announcing live chicken prices, and the basis of the price setting, in Figure 2.

In the old system, we received CFO's idea of the market prices of chicks and feed, the profit margins earned by the chicken farmers, and the resulting farm gate chicken price.  In other words, data rich and verifiable by everybody.

Next, we look at CFO's new system, as shown in Figure 3.

Ontario Farm Product Marketing Commission ("OFPMC") says:

"Chicken Farmers of Ontario (CFO) and the Association of Ontario Chicken Processors (AOCP), initiated the work in 2012, and have invested considerable time and resources over the last couple of years to develop a comprehensive COPF.


The Commission carefully considered the final submissions of the AOCP and CFO, as well as the comments received through the government's Regulatory Registry website in determining the final makeup of the COPF.


The full COPF is described in the regulation in a transparent fashion and includes provisions for the regular updating of the individual elements to ensure the formula remains current and reflects a reasonable return to efficient producers.
The Commission recognises this is a significant milestone in the ongoing evolution of the supply managed system for chicken and will continue to work closely with the CFO and AOCP during the transition to this new COPF."

Sounds pretty good, eh?  You can count on that.  Everything politicians do is always described with rainbows and sunshine.  Let's now look at the reality that occurred the very first time CFO applied the new regulation.

What OFPMC is describing above, and what CFO is supposed to be doing is fully described in Ontario Regulation 402, R.R.O. 1990, CHICKENS — MARKETING, issued under the Farm Products Marketing Act.    Figure 3 below shows CFO's public disclosure of their first implementation of Section 18 of this new Ontario Regulation. 

Figure 3:   CFO's new system

As shown in Figure 3 (the "new improved system"), CFO plunks down a new farm gate price for Ontario chicken.  For all we know, CFO's farm gate price was derived by throwing darts at the wall.

This regulatory method in Section 18 is extremely difficult to comprehend and verify

Who can verify this "improved system" and the number it produces?

Nobody!

How can this new system be seen as an improvement is beyond me.  How is the new system more open, accountable, transparent, and beneficial for all?   Even though CFO is a private enterprise (ie. a lobbyist for monopolistic chicken farmers and their friends), CFO is an action arm of the Ontario government for chicken Supply Management.  As an arm of the government, they have a duty to be open, transparent, and accountable to the people of Ontario.

Look at what we get stuck with by the CFO and the Chicken Mafia (ie. CFO, AOCP, and all their chicken farmers, henchmen, coattail riders, and lobbyists).

It is a disgrace.

Modify Supply Management before it's too late

Yesterday, we discussed our support for the new egg quota trading system for Ontario (see Egg Quota Sale by Auction ).

But wait, there's more!

Supply Management ("SM") was originally created as a clumsy, ham-fisted solution to the power imbalance between individual farmers and the large powerful corporations who bought from the farmers.

SM wasn't perfect then, and is less perfect today.  If the system was supposed to balance power, how come we still have all the same problems as before, and the power imbalance has gotten even worse over the 50 odd years of SM?

Instead of continuing with a flawed SM system for determining how many eggs to grow and the price those eggs are to be sold at, why not apply this same effective, modern tool to that side of SM too.

Here are the facts as I understand them:

1. Farmers know what it costs to grow their eggs.
2. Farmers would like to get the highest price possible for their eggs.
3. The farm gate egg sale price has to be above the farmer's break-even price if they are going to stay in business.
4. There is the ongoing possibility that some farmers are sufficiently incompetent, dastardly, lazy, or unwilling &/or unable to improve that they have lost (or deserve to lose) their social license to continue doing what they do; they need to retire or find a different career.
5. Some farmers are more efficient than others, and therefore have lower break-even prices.
6. Some farmers produce a higher quality egg than others.
7. Farmers need a steady production volume to avoid wild cycles of feast and famine (which can lead to inefficiencies and financial ruin).
8. If a farmer produces a higher quality egg at more reasonable prices, they deserve better remuneration for their skill and efforts.
9. Egg grading stations, egg distributors, and Canadian wholesale and retail customers want to buy the best possible egg at the lowest possible price, and have a consistent supply (not too many, not too few).
10. We are able to do random sampling of a farmer's eggs and develop a quality score.  A time weighted averaging of these quality scores will dampen any short term fluctuations in these quality scores.  The quality levels could be divided into 3 categories (Gold, Silver, & Bronze) with set minimum standards for each grade level.  Due to continuous quality improvements by some farmers, the egg quality will likely improve over time.  Once more than 50% of the eggs are in the Gold standard, the quality standards would be re-defined to re-balance the distribution of eggs into equal thirds again.
11. Egg sales can be done well in advance of the planned delivery date for a farmer's eggs so as to ensure stability in the marketplace (ie. don't grow an egg if you can't sell it).
12. Multiple sales can be done for the same delivery date, so if you are unsuccessful in the previous sale, you can try again in subsequent sale.  As long as there are enough buyers and sellers to hold a sale, another sale is held.  Using automated systems, the sales could happen every day, or every hour, or maybe every 5 minutes if need be.  Buyers and sellers could let their previous bids stand, or based on the results of the previous sale, they can make an adjustment in their bid.
13. For each current specification, there would be 3 separate auctions for three levels of quality (gold, silver, & bronze).  One would think that gold standard eggs would be limited in quantity, and will fetch a premium price.  If there are limited buyers for Gold eggs, the excess Gold eggs can be sold in Silver and Bronze auctions, thereby virtually guaranteeing that Gold eggs will always be sold.  Bronze eggs may have insufficient buyers, and therefore may have to go to a cracking plant at a significant loss in income due to their inferior quality.  This helps ensure continuous improvement in egg quality.
14. The sales are run as a truncated k-double auction, so as to ensure maximum value for consumers.
15. To avoid conspiracies and dysfunctional game playing during the auctions, there may need to be some mechanism or rules to prevent both farmers and buyers from using predatory bidding practices.

This proposal builds a level playing field for farmer, buyers, and the Canadian consumer.

Which of the Supply Management is brave enough to consider this alternative system for ensuring Canadians get the very best deal for their supply management commodities?

You can change a little now, or wait to have the decision ripped from your grasp.  The choice is yours.