Bogus FCR takes $945 Million per year from Canadians

FCR is Feed Conversion Ratio.  IT is the #1 issue on the raising of chickens, for about 60% of the cost of a chicken is the feed used to feed that chicken.

Historically, it took 2.5 lb. of feed to put 1.0 lb. of meat onto a chicken.  With improved genetics and feed formulations, the time taken from day-old chicks to market-ready chickens has been drastically reduced, and so has the FCR.

OMAF website provides the following info on how farmers get paid for the chicken they raise:

Chicken Pricing

Chicken Farmers of Ontario (CFO) has price-negotiating authority. It negotiates the base price paid by primary processors for live chicken with primary processors every sixteen weeks. The live chicken price is determined by a formula established by the Agriculture, Food, and Rural Affairs Appeals Tribunal that includes the price of chicks, feed and producer margin. The producer margin is negotiated annually whereas the feed and chick prices are updated for each pricing period. If the two sides cannot reach an agreement, the dispute goes to final offer arbitration.

The producer margin provides a reasonable profit margin for the farmer, and pays for the farmer's operating expenses and overhead (eg. property taxes, labour, electricity, etc.).  The feed cost is defined by the farmer's feed purchase price ($/kg) multiplied by the FCR (ie. [$/kg feed] * [kg feed/kg meat]= [$/kg meat]).

 

In the Figure above, from a May 2009 report commissioned by the BC Chicken Marketing Board, A75 to A84 refers to the chicken quota production periods of approx. Jul 2007 to Dec 2008.  We can see that Ontario usually has a 1.82 FCR in the above period.  However, in the recent pricing formula use by CFO, an FCR of 2.0 is assumed.  This is an inaccurate bias, giving chicken producers an additional 9.8% above the true cost of their feed.  If feed is 60% of the total cost of raising chicken, then this unfair feed pricing boosts the cost of live chicken by additional 5.9%  for the farmers.

Of course, that 5.9% of unfair profit for farmers gets passed on to the consumer, but it's multiplied by the markups at each of the subsequent steps in the value-added chain.  Allowing for a live to eviscerated weight ratio of 0.7372 and the live farm-gate price of $1.17/kg of live chicken for Period A-116 (Feb. 14, 2013), our equivalent eviscerated price is $1.587/kg of eviscerated meat paid to the farmer.  With a recent Sarnia ON Walmart pricing of $13.54/kg (see Raube's comments), we have a total markup factor of 8.53 (ie. 853% markup from farm gate to meat counter at the grocery store).  Therefore that unfair feed pricing premium of 5.9% at the farm gate gets multiplied to a whopping $0.80/kg at the grocery store.

Since we consume about 1.182 Billion kg of chicken per year in Canada, we have an unfair chicken tax of $945.6 Million per year, just from jigging the farmer's FCR.

Unfortunately, that isn't the only place that the system is rigged against the consumer.  Be patient, my faithful Blog Hounds, we'll get to those other issues soon enough.

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?