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Hamster wheel business

”The worst business of all is the one that grows a lot, where you’re forced to grow just to stay in the game at all and where you’re reinvesting the capital at a very low rate of return. And sometimes people are in those businesses without knowing it.” Warren Buffett, 1998

Between 1990 and 2003, Canadian (beef and cattle) exports increased fivefold, on a volume basis, and eightfold, on the basis of dollar value. This is a spectacular performance. Over the same period that exports were increasing eightfold, farmers’ prices for feeder and fed cattle were collapsing… average prices for recent years are half the values that prevailed pre-1989. National Farmers Union, 2008

Detractors like to characterize the National Farmers Union as being left wing or anti-business. But when it comes to identifying what doesn’t work in business, its recent report on the mess in which the Canadian cattle producers find themselves resonates rather strongly with the observations of Warren Buffett, one of the world’s wealthiest men thanks to his astute picks in the stock market.

Buffett’s comments to an investor meeting 10 years ago were cited in a recent Financial Post column on the state of the U. S. auto industry.

Columnist Larry Sarbit writes: “Over the past 20 years, GM’s revenue has grown at an unexciting GDP-like 2.1 per cent. Eight of those periods saw a decline in that metric. Revenues for the 12 months ended September ’08 are even lower than they were 11 years ago in 1997.

“Capital expenditures, on the other hand, to the end of 2006 grew at almost eight per cent a year. Return on invested capital in the 20 years has had only five years showing this measure above 10 per cent, the rest with single or negative digits.

“The business is on a hamster wheel, expending huge amounts of energy, money and time but gaining no ground.”

Sound familiar? Look across the board in the farming business – grains and oilseeds, cattle, hogs – and it’s pretty much the same story. There has been spectacular growth in productivity and exports, but the benefits to producers have been declining profitability.

“The places where profits are created and where they are captured often are not the same places. Profits are created as a result of efficiencies; profits are captured as a result of power. Thus, because market power shifts can trump efficiency gains, even the most efficient can be left bereft of profit,” the NFU report says.

Its analysis finds a correlation between declining farm gate prices (in inflation-adjusted dollars) and the dramatic consolidation of Canada’s meat-packing sector into the hands of a few large American players, the emergence of packer-owned or controlled cattle, and Canada’s increased dependence on exports to markets it cannot consistently access.

For example, by stubbornly refusing to acknowledge Europe’s distaste for bovine growth hormones, Canada’s beef industry has effectively excluded itself from that market, making it ever-more-dependent on the U. S. But its access there is routinely disrupted by trade barriers – first BSE, and now country-of-origin labelling – which has U. S. packers refusing to accept Canadian beef at all, effectively forcing it through U. S.-owned slaughterhouses in Canada at discounted prices.

Perhaps one of the greatest ironies outlined in the study is the observation that the move towards so-called efficient packing facilities has had the opposite effect on producer prices.

“In the 1940s, ’50s, ’60s, ’70s, and ’80s, using packing plants that were comparatively inefficient, paying workers 22 per cent more, serving a smaller market, and selling to less-affluent consumers, the system was able to pass back to farmers twice as much per animal. How can this be?” it asks.

Grain farmers might be asking the same question of their grain handling and transportation infrastructure.

The NFU’s proposed solutions are a radical shift from conventional wisdom in the livestock business. It is suggesting Canada shrink its beef industry to become more focused on domestic and niche markets – namely by banning packer ownership of cattle, and enforcing transparency into the marketing chain.

It even suggests Canada embrace COOL rather than fight it, discontinue bovine growth hormones and sub-therapeutic antibiotics, that it further develop the grass-fed beef sector, and that it start testing for BSE – to increase the industry’s value-added marketability.

Some would say moving away from production aids that increase the industry’s “efficiency” is a step backwards. But if it also means a return to profitability, it is an idea that is, at the very least, worth considering.

Whether you produce cattle, hogs, grain or canola, this is a report worth reading.

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About the author

Vice-President of Content

Laura Rance

Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at [email protected]

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