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

Innovation for #ChickenMafia's Customers

Is Canada's Supply Management System the heart and soul of innovation in agriculture?  Some seem to think that SM is all about innovation, such as a recent comment on Better Farming's website.



Based on my life experience, #ChickenMafia are mediocre to terrible in innovation and improvement for their customers.  Due to the #ChickenMafia's arrogance and self-centered narcissism, perhaps they focus all of their innovation efforts solely to improve the monopolist's pocketbook. My response to this innovation comment is as follows:

You claim that Canada's SM is innovative.

Where is the proof of that bald assertion?  To me, it seems like an assumption, or is purposefully hyperbole, propaganda, and an exaggeration?

Let's compare our SM industries to all those around the world who are forced to compete and improve, or suffer the consequences.

In competitive industries, I have seen an average rate of improvement as high as 10.4% per year improvement for 20+ years, which totaled 723% improvement over 2 decades (1.104^20= 7.23 or 723%).

Do Canada's SM industries achieve anything close to this?  If so, where is the proof?  If they did, SM food prices would be going steadily down, not up.  For example, if inflation is going up by 3%/yr and SM farmers are improving at 10.4%/yr, consumer prices could drop by 6.70%/yr while SM farmers continue to make a "reasonable" profit (1.03/1.104= 0.9329 or a 6.70% decrease).

Let's look at Canadian factory farm broilers as an example. 

Instead of retail price decreases, Chicken Farmers of Ontario have implemented chicken price increases that caused retail prices to go up 3.57%/yr on average, every year, for at least the last 17 years.

Ontario's factory chicken farmers have a Feed Conversion Ratio ("FCR") of 1.72 but New Zealand's Tegel Poultry for example  (see http://www.wattagnet.com/154106.html ) has an FCR as low as 1.38 on a repeatable basis.  Ontario factory chicken farmers are 24.6% worse than world-class.

Since feed costs are about 60% of the total live chicken price, the poor Canadian FCR raises Ontario's live bird price by at least 14.78% higher than what it could be if Canadians were world class.

Canadian factory chicken farmers aren't good enough to quality for the local public school team, let alone the gold metal at the Olympics.

No wonder Canadian chicken prices are 3 times higher than either US or world chicken prices.

No wonder Canadian factory chicken farmers cry and whine that they can't survive without a 285% chicken import tariff under SM rules.

No doubt Canada's SM farmers have done some improvements, but only at a leisurely pace; in spite of how they puff their chest and claim otherwise.

Being the best in the world is not easy work.  We used to be one of the best in the world.  Not any more.  Canadians pay the price for this mediocre performance.  The factory chicken farmers are guaranteed to get their, no matter what.  What do they care that all Canadians get regularly screwed because of the SM farmer's mediocrity?

However, Canadian SM farmers could be the best again if given the necessary drive and the time to re-develop their weakened (and almost vanished) competitive muscles.  Unfortunately, they choose not to, and take every possible step to resist the necessary changes.

Today, Health Canada reports that 7.6% of Canadians can't afford to feed their families.  Isn't it nice that this impoverished group of hungry Canadians has no SM farmers within it?

Why bother working hard and maximizing innovation when you can be fat, dumb, and happy with a guaranteed monopoly no matter how inefficiently you operate as compared to the rest of the world.

Glenn Black
Small Flock Poultry Farmers of Canada

Is there hope that I convinced anybody to re-consider their opinion?

Am I wasting my breath and electricity writing Blog posts that few read, and those who read, ignore?

It's hard to know.

Easy Road To Riches: The Raping of Canadian Consumers

Why did the #ChickenMafia decide to take the easy road to riches, but which necessitates the repeated raping of Canadian consumers?

In a comment posted on Better Farming's website, an anonymous poster stated:

Not a Shred of Guilt!

There have been many Supply Management farmers in the past willing to suspend upcoming raises at the farmgate or even rollback prices in order to give consumers a break at the grocery store but the retailers have never been trusted to pass that on to the buying public.We see proof of that in the Pizza joints now!The same applies with Beef and Pork,while they were losing money on every shipped animal the Grocery stores made sure they were NOT!
That's why not a single Supply Management farmer should feel guilty about actually making money..the Retailers/Grocery giants don't !

 My response:

You mention that many farmers have been willing to suspend or roll back price increases to help consumers.

In SFPFC's  Blog posting of Feb. 28, 2013 we showed a graph of the #ChickenMafia 's handiwork for Canada Grade "A" chicken retail prices from 1995 to 2012.  It shows steady, managed growth in retail chicken prices of 3.54% per year, non-stop for 17 years (all available Stats Can data). Whether they were willing or not to roll back prices, the #ChickenMafia didn't do it.

Ah, you say, but those are retail prices, and the #ChickenMafia only controls farm gate prices.

True to a point, but the #ChickenMafia also controls the sale, marketing, and distribution of chicken.  The downstream distributors who insist on raising prices could have been red circled at their current chicken quota supply volume, and those downstream supply chains that choose to pass on the savings to consumer could have received the additional volume of quota that was distributed now and again.

The #ChickenMafia could have, but they chose otherwise.

That consistent price increase was part of the #ChickenMafia’s Strategic Plan, and they implemented their plan on the backs and life blood of Canadian consumers.

What the #ChickenMafia could have done was say something like the following:

 "Boys, we need to get a lot better, a lot more quickly.  Our chicken monopoly isn't our God-given right, it was given to us by the government as a sacred trust on behalf of the Canadian people.  Canadians want and need us to do an excellent job for them.  They don't want the charity of free chicken. They want affordable chicken." 

 "Canadians also want us to be 3-way sustainable; environmentally, financially, and in a generational sense so the next generation of chicken farmers have a future."

"That's why your leadership has prepared plans to help you rapidly improve your operations, so that you can achieve a reasonable return for your work and investment, and at the same time, the retail price of chicken in Canada keeps getting cheaper and cheaper."

"Our plan assumes that retail chicken prices will roll back at the same rate that we jacked them up for the last 17 years:  3.54%/yr price reductions.  We assume our COP (Cost of Production) will increase at 3.0% per year.  That's why our plan calls for us to improve ourselves at 6.54% per year.  I believe we can do that, as we're all going to work together and help each other, and do whatever it takes to make it happen."

"We think we have a pretty good plan, but it needs to be a lot better.  That's why we have come to you today, the true experts on chicken farming, to seek your input and help us build an even better plan."

"With that plan and much hard work by both you and your leaders, we will soon be the world's best chicken farmers; something that your family, all Canadians, and the world will marvel at, recognize, and appreciate."

"After our leadership by example, next we will share all that we have done with all other producers and farmers world-wide, so that they can more easily follow in our footsteps."

"Of course, that sharing and helping other chicken farmers world-wide will mean that us Canadian chicken farmers will have to continue working hard and continuously improving, or we will soon lose our position of chicken leadership.  But we believe that all of you are up to that challenge; if not today, then soon, for we will all work together and help each other."

"I now put the motion to a vote.  Do you Canadian chicken farmers accept your recommended destiny of working towards doing the best we can for Canadians, and being the best chicken producers in the world?"

To the best of my knowledge, Canada's chicken farmers haven't done that yet.  But if they so choose, they could do it tomorrow.

But they won't.

Likely, they'll scoff, call me names, summarily dismiss and never consider this idea until it's too late to save themselves.

That's why Small Flock Poultry Farmers of Canada (“SFPFC”) exists.

SFPFC will work tirelessly towards encouraging (or forcing) the changes that must occur in the Supply Management systems of Canada.


Glenn Black, President
Small Flock Poultry Farmers of Canada

Does CI Work?

I have proposed that the Chicken Supply Management System should be applying true CI (Continuous Improvement).  I have received some feedback, stating that my idea of CI may work for a task, but not for animals or plants.

I beg to differ.

The milk data is from FAO, as reported by Canada to the United Nations.  You can see all of this data via Gapminder, Agricultural dataset.  Here is a graph showing the Canadian cow milk yield, kg of milk per cow per year).  Notice the 2.5% per year improvement in milk yield.



Part of the improvement is genetics, but their is also the feed regime, the milking methods, health, etc.

Since 60% of the cost of chicken is the feed costs, this is obviously a place to focus the efforts to improve.  The rest of the data is from Statistics Canada



Above, we see the 1.39%/yr improvement in the grain corn yields in Canada.  Corn is one of the most important grains used in chicken feed.  The second major ingredient for protein is soybeans,  Here, we see a



0.793%/yr improvement.  Wheat is also used in some feed formulations, and here we can see a 1.33%/yr



improvement.

I had suggested 4% learning rate for raw materials, as recommended by NASA.  Milk came the closest at 2.5%/yr.  Perhaps with a more focused program, with better tools, and industry-wide efforts, more could have been achieved.  Individual efforts are good, but much more can be achieved when the entire industry take CI on as a project, and work as a team to achieve the goal.

Hopefully, this is enough proof that improvements can be achieved in agriculture, as they have been done for years.  People (ie. farmers) and processes (tractors, cultivators, sprayers, etc.) are the most important part of getting feed to the chickens.  I believe all of these systems can be significantly improved.

McDonald's Restaurants have kept their same suppliers for meat and buns for decades.  They have established a hard-fought continuous improvement relationship, and achieved excellent results.  McDonald's competitiveness and success has greatly depended on its suppliers.

I believe that the success of the chicken farmers is highly dependent on their feed suppliers.  They need to work closely together to achieve what needs to be done to supply high quality, low cost chicken to the Canadian public.

So if all of these yields are showing improvements, why is the cost of the chicken's feed going up, instead of going down?  It is because somebody is gaining excess profits, or the other costs have been allowed to run a muck.

The Power of Continuous Improvement

This post expands upon the brief mention of Continuous Improvement in another post

Everybody in the chicken supply chain seems to assume that the price of their chicken and their profits should rise forever, equal to or greater than the cost of living increase.

That's quite an assumption.  I wonder who suggested that to them, or gave them permission to make that glaring assumption?

CFO says they continuously improve.  Do they? 


In 1936, T.P. Wright discovered the Learning Curve where we can expect a certain rate of improvement every time the total units produced has doubled.   If CFO had adopted a philosophy of continuous improvement, and helped its chicken producers, suppliers, and the entire value-added chain to understand, adopt, and apply these concepts, we would have seen the following improvements in retail chicken prices.

Chicken Learning Curve, at 4% per doubling.

"CumAvgCost" is Cumulative Average Cost.  Item cost is highest for 1st item produced, and lowest for the most recent item produced, so this sums the aggregate total cost of all items produced to date, divided by the total number of items produced, giving the overall average cost.

"Unit Cost" is defined as the cost of production for this specific item.

For systems that are truly limited by raw material costs, improvements rates are typically 4% per doubling, one of the lowest improvement rates for all processes (ie. other processes have an Improvement Rate as high as 25% per doubling for repetitive manufacturing systems).

Since CFO feels that the cost of chicken is primarily determined by the input costs to purchase chicken feed (ie. a raw material), we will use this 4% as the limiting step for this example. 

That would be nice for consumers to look forward to, chicken prices that are getting more and more affordable each year.  Instead, what do we get in reality?

The above graph shows that the Canadian Supply Management System has built in an annual inflation in the cost of chicken for 2.53% per year.

Why does our chicken prices go up by 2.53% per year, when according to Learning Curve, our prices should go down by 4% per year?

The simple answer, until proven otherwise, is that neither CFO, nor CFC, nor anybody in the entire chicken value-added supply chain is practicing what they preach:  Continuous Improvement

They spout nothing but hypocrisy.  They use fancy, politically correct words that mean nothing.  If they truly knew what they are supposed to be talking about, we could call them bold faced liars.

However, we need to give them the benefit of the doubt.  They may not be liars.  The simplest, most obvious answer is plain incompetency.

Unfortunately, every Canadian gets to pay the price for the lies and incompetency of a few.