BC Chicken Growers Association Chicken Pricing Proposal BC Chicken - - PowerPoint PPT Presentation

BC Chicken Marketing Board Abbotsford, BC April 15, 2016

BC Chicken Growers Association Chicken Pricing Proposal

Appendix 2

Purpose

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1.

To follow-up and elaborate on the Growers request for the Board to regulate catching costs.

2.

To outline the problem currently facing chicken growers in BC; and

3.

To propose options to address the problem

The Problem

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• The live price set for chicken grown in BC has been a

contentious issue despite relative stability over the past 6 years.

• BC chicken growers have experienced increased cost

pressures relative to other production regions over this time period, particularly in feed and chick costs.

• Changes to the Ontario pricing formula has resulted in lower

live prices.

• Continued linkage to Ontario prices must reflect the

additional costs of production in BC.

Catching Costs

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• Initial view

Catching costs were the root problem

• Growers have further assessed the problem:

Cost Competitiveness of BC Chicken Production Study

(Al Mussell, Agri-Food Economic Systems)

Grower Return Study

(Kevin Grier Market Analysis and Consulting Inc.)

Stocking density impact analysis

(Kevin Grier and Bob Burden, Serecon)

BC Turkey Industry Pricing model

(BC Turkey Marketing Board)

Supplemental Research

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• Board initiated COP

(Bob Burden, Serecon)

• BC versus Ontario COP Analysis

(Bob Burden, Serecon)

• BC Poultry Association initiated Impacts of

Transportation Constraints on Grain Costs in the Fraser Valley (Bob Burden, Serecon)

Findings

• Cost Competitiveness of BC Chicken Production

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• Developed benchmark comparisons of laid-in costs of live chicken

to the processor

BC cost is lower than Alberta (1.44 cents/kg) BC cost equivalent to the old Ontario base ($1.6611 vs $1.6614) BC cost higher than the new Ontario base (1.96 cents/kg) BC cost higher than Saskatchewan and Manitoba

(0.52 to 1.59 cents/kg)

• Cost differential results from:

Transportation costs lower in BC (3.9 cents/kg versus 5.4 (Ontario)

and 7.7 (Alberta)

Western provinces grower paid catching costs lower than Ontario

processor paid cost (3.5 cents/kg (BC) versus 4.75 (Ontario – 1 leg catching))

Findings

• Grower Returns Study

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• Benchmark reference on grower returns after feed, chick and levies.
• Feed Cost

 Ontario lowest overall feed costs (A-129-134)  BC feed cost significantly higher than other provinces

 20% higher than Ontario ($483 vs $399)  $475 - $490 per tonne

• Chick Cost

 BC 2nd lowest ($0.72) after Ontario  Levy – BC 2nd lowest after Alberta  BC costs are increasing

• Feed, chick and levy total after conversion rate:

 BC costs highest ($1.23/kg) , due to feed costs  Ontario lowest ($1.07/kg)

• Margins over feed, chick and levy cost (no accounting for premiums paid):

 BC lowest at $0.39/kg  Ontario $0.47/kg (same as Prairies when catching included)  Prairies $0.50/kg

• BC grower margins will further erode due to rising chick cost

Findings

• Stocking Density

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• Chicken Farmers of Canada Animal Care Program

requirements

Normal stocking density limit of no more than

31 kg/m2

Farmers may stock between 31 kg/m2 and

38 kg/m2 if additional requirements are met regarding record keeping and flock monitoring.

• BC maximum density set at 32.5 kg/m2

Other provinces maximum 38 kg/m2 Impact 6.34 cents/kg higher cost to BC producers

Findings

• BC Chicken Cost of Production

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• Defined – “the total sum of money needed for the production
• f a particular quantity of output”

“the payment or expenditures essential to get the factors of

production of land, labor, capital and management needed to produce a commodity. It signifies the money costs which are to be incurred for the acquisition of the factors of production.”

“COP requires the valuator to apply basic valuation principles

to determine the actual cost independent of how the costs were financed.”

Findings

• BC Chicken Cost of Production

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• BC A-135 cycle adjusted for new Linkage Agreement

The costs provided reflects a valid COP for chicken Total cost $1.7154/kg BC live price (A-135) - $1.5981/kg Return – negative $0.1173/kg

Findings

• BC COP versus Ontario

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• Ontario COP = $1.5641/kg

BC COP = $1.6895/kg (not adjusted for new linkage agmt) BC difference (–$0.1254/kg)

• Attribution of differences

Labour 7.0 cents/kg higher in Ontario Capital 6.4 cents/kg higher in BC Feed 9.6 cents/kg higher in BC Chick 3.6 cents/kg higher in BC

• The spread increases to $0.1513 ($1.7154 - $1.5641)

adjusted for the new Linkage Agreement.

Findings

• Stocking Densities

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• BC stocking density

Maximum of 32.5 kg/m2 with animal care program

requirements

• Other Provinces

Maximum up to 38 kg/m2 with animal care program

requirements

• BC at up to 6.34 cents/kg cost disadvantage

For a 1,875 m2 (20,000 ft2 barn)

38 kg/m2 would hold 71,000 kg of production 32.5 kg/m2 would hold 61,000 kg of production

Findings

• BC Turkey Industry Pricing

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• Recognition by processors and growers, BC growers at a disadvantage

due to feed and poult costs.

• Model uses local input costs to calculate margins after BC feed and poult

costs.

Feed costs – Ritchie Smith list price Feed conversion ratio, weights and consumption data from the Hybrid

Converter Charts

Poult cost – Lilydale list price with all services Establishes an upper and lower limit (rails) on the “margin” (2 standard

deviations)

Margin calculated on a weekly basis Increase or decrease in price triggered when the margin is above or below

the rails for two consecutive weeks

Live price based on Ontario, plus differential plus or minus margin trigger.

Research Conclusions

• BC Disadvantaged

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• Highest cost of production

12.5 – 15.1 cents/kg higher costs (A-135) in BC than in

Ontario (before/after the new Linkage Agreement)

• Lower maximum stocking densities in BC

Up to 6.34 cents/kg differential in cost of production

• Lower returns after feed, chick and levy costs

At least 10 cents/kg lower than other provinces.

• BC processor comparative advantage a direct result of lower

transportation costs and grower paid catching costs

Problem Restated

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• The COP data demonstrates that BC chicken growers are

living off of their depreciation with live prices not covering COP .

• Current pricing does not factor in the higher costs of feed,

chicks and capital in BC than in Ontario and other western provinces

Options for Consideration

• Status Quo

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• Negotiated agreement of weighted average of Ontario and the

Prairies plus 4.85 cents/kg

Pros:

 Processors maintain comparative advantage relative to other provinces.

Cons:

 BC growers fail to cover COP and continue to erode future capacity to

reinvest in improvements and innovation

 Live price differential eroded by catching costs thereby not addressing

• ther BC cost pressures (feed and chick price)

 Chick costs will increase

 BC growers exiting the sector  Inability to draw in new producers  BC growers continue to fall further behind growers in Ontario and other

provinces

Options for Consideration

• Modified General Order Formula

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• General Order Formula (Weighted average Ontario and Prairie

price plus 4.35 cents/kg); plus

• BC FIRB Supervisory Review catching cost (2.8 cents/kg)

Pros:

 Processors maintain comparative advantage relative to other provinces

Cons:

 BC growers fail to cover COP and continue to erode future capacity to

reinvest in improvements and innovation

 Provides slight improvement over status quo (0.2 cents/kg)  Chick costs will increase

 BC growers exiting the sector  Inability to draw in new producers  Processors not likely to accept lower catching cost of 2.8 cents/kg

Options for Consideration

• Processor Paid Catching Costs

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Board to “regulate” catching costs

• Shift responsibility from growers to processors

Pros:

 Consistent with the Board’s powers and would fulfill the Board mandate to

“regulate and control” all aspects of “production and transportation” of chicken.

 Live price will reflect the actual differential received by growers.  Processor responsibility for costs eliminates the ability of the processor to

manipulate the effective live price paid in the absence of a catching agreement.

 Brings closure on the F.O.B. issue.

Cons:

 Catching costs have not been regulated in the past and the sound marketing

rationale for regulating may be subject to challenge.

Options for Consideration

• Cost of Production

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Adopt Cost of Production approach

• Live price = COP

Pros:

 Recognizes the higher costs of production, particularly feed, chick and capital

in BC

 BC grower margins will improve and facilitate reinvestment, new entry and

innovation.

 In keeping with the Producer Pricing Pillar of Supply Management – “fair

price based on what it costs to produce”.

Cons:

 Will result in an initial increase in processor costs for chicken  Will increase processor claims of loss of comparative advantage relative to

• ther provinces

 Fully decouples BC price from Ontario price which could affect overall

competitiveness of the BC industry.

Options for Consideration

• Modified Turkey Marketing Board Model

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Modified Turkey Marketing Board pricing model

• Use lessons learned from the Turkey Marketing Board
• Use COP as opposed to a gross margin approach.
• Use live price based on Ontario live price plus a differential linked to BC COP
• Board regulates catching cost shifting responsibility from growers to processors.
• BC COP adjusted on a cycle by cycle basis for feed and chick prices.

Pros

 Provides a cost-based approach that enables growers to cover their costs and improve

margins, facilitate reinvestment and innovation.

 Establishes a sleeve above and below the base COP which allows for fluctuation in COP

without triggering an increase or decrease in price differential, providing processor greater cost certainty and increased stability in the future.

 Retains linkage to Ontario

Cons

 Will initially increase the live price of chicken paid by processors and increase claims that

BC processor comparative advantage will be unduly compromised.

Grower Request

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The Board to entertain discussion on adjustments to the current pricing agreement based on

• Recent increase to chick price due to new linkage

agreement; and

• Due consideration of the documented cost pressures facing

BC growers.

Grower Request

04/15/2016 Chicken Pricing Options

A new pricing model with the Board evaluating

• Full COP

versus

• Modified Turkey Marketing Board Pricing Model

The Board also give consideration to.

• Modifying current maximum density

Shift from 32.5 to 38 kg/m2

22

Modified Turkey Model Simulation Grower paid catching costs

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Modified Turkey Model Simulation Processor paid catching costs

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