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.

Food Factory For Fowl

If you want to raise chicken, you have to feed them.  At my farm, I do free range.  The girls get let out of the chicken coop most days by 1:00 PM so they can make their appointments as the dust bath beauty parlors all around the coop.  When they come out, they are free to grab a fly, worm, or bug to supplement their diet.

If you have a chicken factory with an average size flock of 29,000 birds, you don't have that option.  If you were silly enough to open a really big door, by the time they all got out of the barn, coffee break would be over, and they'd all have to come right back in again.  There wouldn't be time to find a bug, let alone eat it.

Almost all of the commercial growers buy their feed from a feed mill, rather than growing and making their own feed.  So who do they go to to get chicken feed?

You may have seen some very fancy trucks going here, there, and everywhere in Ontario.  I understand they carry a lot of chicken feed.

Wallenstein Feed transport truck.
Photo courtesy of Doug McKenzie at http://www.hankstruckpictures.com/dm_fergus2004.htm

Five axle trailer, all aluminum body, aluminum wheels on the tractor, chrome everywhere, with the fancy light accessory package.  Nice!  How much do you think one of those babies is worth?  Obviously, profits are good to be able to afford an entire fleet of these kind of trucks.

Could this be a major factor in the high cost of chicken in Canada?  Note the previous posting on the mechanism for passing rising feed costs directly to the chicken consumer.

This one is owned by Wallenstein Feed & Supply.  Wallenstein is a family-owned local feed mill, unlike those big nasty trans-national competitors like Cargill, Nutreco, Ridley, and Viterra.  Wallenstein claims to be the #1 feed mill in Ontario for chicken feed, with 25% market share.

Source:   2013 Alltech Global Feed Report
http://www.alltech.com/sites/default/files/2013-feed-tonnage-report.pdf

According to their annual financial report, Animal Nutrition Canada claims 23% of the overall Canadian feed market share.

Broiler feed is about 0.96 Million MT/yr for Canada.  In 2011, Ontario produced 3333.236 Million kg eviscerated chicken, while Canada produced 1,023 Million kg, so Ontario did 32.57% of the Canadian total.  Assuming the FCR is the same across Canada, ON broiler feed consumption is 0.3257 * 0.96 * 10^6= 0.3127 million MT of broiler feed for ON.  With a Wallenstein market share of 25% in ON, they would have produced about 78,168 MT of broiler feed in 2011.

Rule of Three & Four
A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest.

This means that market shares of these 3 market leaders tend to be in a ratio of 4:2:1.  Generally, all of the other competitors beyond the top 3, will hold between 0% to 10% of the total market share.  Based on this heuristic, the following graph shows the resulting market share:

This would predict that the market leader should have a market share of 51.2%, not the 25% that Wallenstein currently claims.  Why the difference?

The Rule of Three and Four applies to stable, competitive markets.  It generally does not predict when these two pre-conditions do not exist.

There is a huge consolidation going on around the world.  Most feed companies are using every dollar of profit, and every dollar they can borrow to buy their competitors.  One example is Parrish & Heimbecker (P+H) with head office in Cambridge, with 11 sites across Canada, who has been on a buying spree as well.

I would suggest that the mergers and acquisitions will continue at an ever increasing pace until the 51% is achieved or exceeded.  It will only be stopped when Canada's Competition Bureau steps in to stop it from further consolidation until there is just one feed gorilla left who owns all of the market.

Supply Management monopoly attracts the formation of surrounding monopolies, the feed mills being one of them.

I'm taking bets as to whether the winner will be Wallenstein, P+H, Cargill, or a foreign invader.  Place your bets.

Will Wallenstein eat its competitors?  Will a competitor eat Wallenstein?

It's only a matter of time, as the sharks circle their victims.

Fair Feed For Farmers?

A total of 19.642 Million metric tonnes of animal feed were produced in Canada in 2012.

The Dairy industry is the biggest consumer of compounded feeds, approximately 50% of the total feed tonnage.  Broilers are 4.9%, layers are 4.1%, so together the chicken fed consumption is 9.0% of the total feed consumed in Canada.

The animal feed industry in Canada is going through many changes.  Mergers and acquisitions are the name of the game today.

Animal Nutrition Canada claims to have the largest share of the feed production market, 23% of the Canadian total.  They sell under the brands Shurgain, Landmark, Nutreco, Mapleleaf.

Other major feed players are:

• Ridley, with Masterfeeds, AGP Co-op
   
• La Coop Federee
   
• Cargill, with Provimi, Hi-Pro, Purina, Nutrena
   
• Viterra
   
• Glencore

I understand that Wallenstein is one of the largest chicken feed suppliers in Canada, but have been unable to confirm this as of yet.

Typical feed cost for chickens is about $384 per metric tonnes ("MT").  As calculated previously on this Blog, if chicken feed has increased by 60% during the same period that cat & dog food increased 20%, that means that there is an excess charge for chicken feed of  $96/MT.

With poultry eating a total of 2.12 Million MT per year, that is a total gouging of $203.52 Million per year.  The farmers gladly pass those excess costs onto their suppliers, who mark it up further as it works its way down to the lowly consumer.  Assuming 40% markup at the producers level, and another 40% at the wholesale/distribution level, the gouging approaches a total of $398.9 Million per year.

Poor consumer.  When will we get relief from all of this economic sludge being poured down our throats?

Monopoly vs. the Guillotine

I had previously posted some interesting data on the inflation occurring in the animal feeds supplied to the Supply Management sectors.  Price of dairy and chicken feed (Supply Management monopoly) are up 60%, while dog & cat food ("Free Market, non-monopoly") are up just 20% in the same time period.

Professor Baines of York University, Toronto ON Canada has apparently had similar concerns.  In his paper published on April 22, 2013 "Food Price Inflation and Redistribution Toward a New Analysis of Corporate Power in the World Food System", I found the following graph of C4 indexes:

C4 is a measure of the market share by the four biggest companies in that market.  "ADM" is Archer Daniels Midland (USA).  ADM's Canadian subsidiaries sources, stores, transports and processes crops such as wheat, cocoa and oilseeds at a total of 42 facilities manned by more than 1,000 employees.

ADM, Bunge, and Cargill are like 3 peas in a pod.  Let's take Cargill as an example.  Cargill started as a US company in 1865, before Canada was born.  Today, it is a trans-national producer and marketer of food, agricultural, financial and industrial products and services with 142,000 employees in 65 countries. As world-wide as Cargill is, in 2011 it generated 37% of its world-wide revenues from its North American operations (Ref: Baines 2013, op. cit.).  That's why Cargill spends about $1.5 million per year lobbying the US government.  In Canada, Cargill Limited is headquartered in Winnipeg, Manitoba and employs over 8,000 people across Canada.  Leonard Penner, Cargill's Canadian President has done lobbying in Ottawa, 23 meetings with the Ottawa mandarins and bureaucrats in the 23 days between Feb. 26/13 to Mar. 20/13, sometimes meeting with 8 different people in one day.  Busy guy.  No matter how you slice it, Cargill is BIG, and they are used to throwing their weight around in Washington, Ottawa, and Queens Park.

As you can see, the flour milling, soy crushing, and wet corn milling sectors have been steadily over-taken by these 3 dominant players.  Soy crushing and wet corn milling are central to the animal feeds industry.  In 2002, these 3 players controlled 71% of the soy crushing market.  Control these critical processes, and you have a strangle hold on everything upstream and downstream.  Nobody can move without your permission.

As can be seen from Baines' Figure 9 above, the more people starve, the more profitable it is for the Agro-Traders Nexus (see below):

Now they have figured out how to maximize their profits by people starving to death.

Upon being informed that the citizens of France had no bread to eat, Marie Antoinette , Queen-consort of Louis XVI of France, exclaimed "let them eat cake".  She ended up losing her head for that shortly later.

Are we prepared for the consequences of the Agro-Trader Nexus maximizing their profits as their corporate Mission Statements compel them to do?

Alternatively, should we inquire if France has a few used guillotines for sale?