| | So you survived the drought ... and were set to turn a tidy profit with this fall's calves. Then came May 20th ... arguably one of the darkest days in the history of Alberta's beef industry. I've been fielding questions from Alberta cow/calf producers on a regular basis that start out with ... "Now what do I do about ...?"
Invariably these questions focus on a specific decision. Do I keep my calves? Do I hold and re-breed my "culls". Do I sell my bred heifers into the slaughter market? The list goes on.
Now, more than ever, it's time to sit back and take a long hard look at the long term outlook for you and your farm as a participant in the Alberta beef industry, and particularly in the cow/calf business. I know the pressure is on to make a few decisions. But before you get to far down the road, take some time to i.
Why Think "Strategically"
In my mind, there's an unsettling number of folks who are assuming that once the border opens, we'll go back to "business as usual". From my experience, and the information I've taken in, this assumption can be dangerous in a couple of significant ways:
- the "when" to a complete border opening could be weeks, months or years. In the meantime, partial trade constraints will create pricing "imbalances" that will filter back to calf and cull values in uncertain ways.
- more importantly, the "if" of going back to "business as usual" looms large. My conclusion is that the industry will be faced with a new reality with pricing settling to a lower plane.
All-in-all, this will pressure businesses to re-structure. Changes at the margin, those incremental adjustments you've been making to improve your productivity and unit costing over time, will not be adequate in the "new industry".
How did I come to this conclusion? It comes back to "Why Do We Keep Cows?". If we're in the business for long run profit, then the historical economic performance of the cow/calf sector will tell us much about where we, as individual producers, need to go in the future.
It's In The Numbers
Let's take a look at an AgriProfit$ analyses for clues. The provincial average return to equity (profit) for cow/calf enterprises over the seven year span of 1995 - 2001 is shown in Figure 1.
The six year average profit for the ‘96 to ‘01 period was $0.07/lb. weaned. It's important to recognize, when looking at these averages, that:
- many of these AgriProfit$ herds are part of multiple-enterprise farms. Often the "other" enterprises cash flow the cow herd through the leaner times. Over the longer term, however, the cow herd needs to turn some level of profit.
- Alberta is a large and diverse province. Averaging over the province masks annual and regional events that push this average either way. Individual performance over this time may vary significantly from the average.
- as averages they imply that there are producers above and below this mark.
Events like BSE will depress market prices and, as a result, pressure profits down over the long haul.
On to the next step. You have little control over market prices, and ultimate control over your unit production costs. I've shown the profitability of high and low cost AgriProfit$ herds, as separate groups over time, in Figure 2. Low cost herds are consistently profitable and, more importantly, contribute to overall net farm income and risk reduction. Conversely, high cost herds rarely pay for farm resources utilized, are a net drain on farm cash position, and put the rest of the farm at greater financial risk.
Strategies ... and More Strategies
The post-BSE world will likely mean market prices will settle at a new, lower level. Considering the historical costing relationships, there is simply too much at stake for producers to avoid being long term and strategic in their management.
But how does this translate into a "business strategy" for cow/calf producers? Brester and Penn laid out the notion that businesses have the choice between "differentiated" and "low cost" strategies to remain competitive. The "differentiated" strategy implies you invest in producing something sufficiently different from your competitors that the market will pay a premium for. To follow this strategy, you've always got to be a step ahead in being "different". There are added costs and risks.
Following the "low cost" strategy implies that you invest in structuring your business to aggressively capture cost efficiencies. A portion of profits are re-invested in continually grinding down unit costs to improve margins.
You'll want to set your strategy as to how you will respond. The low cost approach is likely the strategy of choice for most Alberta producers. Jeff Millang will present a twist to this discussion on business strategies in the next AgriProfit$ newsletter.
Home Stretch
We'll need to take a hard look at our production systems, gearing up to make some fundamental changes in facilities, equipment and land we will deploy over the long term. The aim will be leaner production systems, combining feeding and grazing resources with a different approach to how and with whom we do business.
1. Brester, G.W. and J.B. Penn, "Strategic Business Management Principles for the Agricultural Production Sector in a Changing Global Food System", Trade Research Center, Montana State University, Policy Issues Paper No. 11, Nov. 1999
Dale Kaliel
Sr. Economist: Production Economics
Phone: 780-427-5390 Fax: 780-427-5220
dale.kaliel@gov.ab.ca |
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