http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/com8248
Ag report shows no unfair packer pricing because of BSE
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March 11, 2004
Consumers saw 20-per-cent beef price reductions in 2003
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Highlights of report:
Information available to the department does not suggest unfair packer profits.
Alberta consumers enjoyed an overall 20-per-cent price decline at the beef retail counter in the last half of 2003.
Government BSE programs worked as intended by moving cattle through the beef chain.
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Edmonton… Alberta meat packers did not profit unfairly from the Bovine Spongiform Encephalopathy (BSE) crisis, based on information available to Alberta Agriculture, Food and Rural Development and released in a report today. Instead, it was Alberta consumers who benefited through 20-per-cent overall reductions in prices at the beef retail counter.
Shirley McClellan, Deputy Premier and Minister of Agriculture, Food and Rural Development, said the review, called Pricing in the Beef Industry, also showed government BSE programs worked as intended, moving 1.2 million head through the beef chain.
"BSE irrevocably changed our entire cattle and beef industry," said McClellan. "Packers were no exception, as they faced increased costs of equipment and labour while coping with the loss of an international marketplace. Based on available data used in this review, there does not appear to be support for claims of unfair packer profits." More information on costs and how they have changed for the packing industry may become clear through the review process of the Standing Committee on Agriculture and Agri-Food.
The review showed during the last six months of 2003 consumers benefited at the retail beef counter as they saw an overall 20-per-cent drop in beef prices.
"For high-end cuts like t-bones or ribeyes, prices stayed steady. But for low-end cuts such as ground beef and chuck roasts, prices dropped substantially. This was also at a time when Alberta retailers and consumers showed their support for the province's beef industry by offering and buying beef specials," said McClellan.
The review also looked at how the introduction of federal and provincial government BSE recovery programs influenced the beef chain.
"Our programs aimed to break the logjam of product caused by border closures," said McClellan. "Unlike other export commodities such as grain or oil, the beef industry can't stockpile product. We needed to get the beef chain moving for the benefit of those directly in the industry and those who service it."
The review showed programs worked as intended, moving 1.2 million cattle through the beef chain. Slaughter rates dramatically increased with the introduction of BSE programs, from 18,000 head a week to about 44,000 head, close to normal slaughter numbers.
McClellan noted that compensation programs were designed in full consultation with the cattle industry, and were meant to keep the beef chain in good working order to take advantage of markets when they re-opened.
Copies of the evaluation are available on Ropin' the Web (click here).
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For further information, contact:
Ken Moholitny
Assistant Deputy Minister
Agriculture, Food and Rural Development
(780) 427-1957 Alberta Ag Media Line
(780) 422-1005
Dial 310-0000 for toll-free access outside Edmonton
March 11, 2004
Pricing in the beef industry
Why did you do this review?
Because of the current supply and demand imbalance in the beef industry, many Albertans were questioning why there was such a large disparity between the price the producer received and the price consumers paid at retail or in a restaurant.
How was the review done?
The Alberta Agriculture, Food and Rural Development evaluation used available pricing data from CanFax, AC Nielsen and Statistics Canada, as well as interviews with representatives from the packing and retail sectors, to assess claims of unfair pricing in the beef supply chain.
What did the review show?
The evaluation showed that consumers enjoyed a 20-per-cent decline in the average price of beef in retail stores across Alberta. The most significant declines occurred in the cheaper cuts of meat, such as ground beef and chuck.
Based on available data used in this review, there does not appear to be support for claims of unfair packer profits. In fact, BSE has resulted in higher costs for packers, mostly due to changing standards for testing and regulation. And since margins do not address increased costs, they cannot be used to prove or disprove claims of unfair profits.
Why don't margins reflect the increased costs?
Margins are simply the difference between the price the product is purchased for and the price at which it's sold. For packers, the margin is the price of fed cattle and the average wholesale price of boxed beef. For retailers, the margin is the difference between the wholesale price of boxed beef and the average price of retail cuts.
How did the government BSE programs impact the industry?
BSE compensation programs, designed in full consultation with the cattle industry, the federal government and other provinces, aimed to keep the beef chain in good working order to take advantage of re-opened borders.
These programs aimed to break the logjam of product caused by border closure. They worked as intended by moving 1.2 million cattle through the beef chain. Slaughter rates dramatically increased with the introduction of BSE programs – from 18,000 head a week to about 44,000 head.
Because feedlot operators were able to maintain reasonable returns, because of the BSE assistance programs, cow/calf producers who marketed fall-run calves saw prices in the fall of 2003 as good as 2002 or better.
What additional costs have packers had to deal with?
Although there is no specific data on costs, interviews with packers highlighted some of the additional costs increases. These include: extra labour costs associated with segregating cattle more than 30 months of age from those less than 30 months of age; operational adjustments for export markets, including extra storage costs; changing product mix to meet export markets, requiring more labour to produce the same amount; and, costs of removal and disposal of Specified Risk Materials.
Why aren't Alberta consumers paying less for beef?
In fact, there was a dramatic decline of 20-per-cent in average retail price of beef in the last six months of 2003. However, some cuts—such as steaks—remained in high demand, while there was little supply available. This meant that the retail price of steaks remained high.
Cheaper cuts of beef—such as ground beef and chuck—were more responsive to the increased supply available. The prices for these cuts dropped significantly.
Was this the first evaluation of its kind in Canada?
No. The Quebec Government did a similar evaluation of the retail price of beef. They found no evidence to support the claim that there was unfair pricing on either the packer or retail portion of the Quebec beef industry. As well, they noted that the retail beef price in Quebec declined an average of 15 per cent because of BSE.
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For further information, contact:
Darren Chase
Unit Leader, Strategic Information Services
Agriculture, Food and Rural Development
(780) 422-7101
Dial 310-0000 for toll free access outside Edmonton
March 11, 2004
Average retail price for beef in Alberta, May to November
The information on these tables is from ACNeilson data, which uses actual sales information, including specials and other promotions.
Average price of regular ground beef ($/kg)
May 18, 2003 $4.85
July 20, 2003 $3.49
August 10, 2003 $3.75
September, 14, 2003 $2.58
November 2, 2003 $2.96
Average price of t-bone steaks ($/kg)
May 18, 2003 $21.52
July 20, 2003 $21.04
August 10, 2003 $20.21
September, 14, 2003 $19.53
November 2, 2003 $19.46
Average price of inside round roast ($/kg)
May 18, 2003 $9.66
July 20, 2003 $9.78
August 10, 2003 $7.29
September, 14, 2003 $7.97
November 2, 2003 $8.95
Average price of stewing beef ($/kg)
May 18, 2003 $8.58
July 20, 2003 $8.13
August 10, 2003 $7.06
September, 14, 2003 $6.83
November 2, 2003 $8.24
.
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For further information, contact:
Darren Chase
Unit Leader, Strategic Information Services
Agriculture, Food and Rural Development
(780) 422-7101
Dial 310-0000 for toll free access outside Edmonton
March 11, 2004
How the cattle and beef industry works
Alberta's cattle and beef industry is based on a complicated chain of interactions—from producers to packers to retailers. There are many steps in between the producer selling his cattle to consumers purchasing beef in a retail store.
Canada's beef industry
Canada is a net exporter of beef. Our production sector is set up to produce 90,000 head per week, but our packing sector can only slaughter—at full capacity—70,000 head per week.
Domestic beef consumption is typically 40,000 head per week.
The remaining slaughtered cattle—called boxed beef—and live cattle are shipped to other countries, such as the U.S. and Mexico. For example, prior to May 20, 2003, about 20,000 head of live cattle per week were shipped to the to the U.S. for slaughter or finishing.
How the industry works
A cow-calf operator—usually a small rancher with a herd of cows—breeds calves for sale to a feedlot. Typically, these producers have set their operations up so that their cows give birth in the spring and the calves can then be sold at market in the fall. These calves—usually weighing around 600 to 800 pounds—are sold to a feedlot operator.
Feedlot operators are the owners of facilities that finish cattle, anywhere from 300 to 15,000, to what is called a slaughter weight—more than 1,200 pounds—by feeding them a high-protein ration. They will then sell these slaughter weight cattle to a packer or other buyers at market.
There are both federally inspected and provincially inspected packing facilities in Alberta. Meat from provincially inspected facilities can only be sold within the province, while meat from federally inspected facilities can be shipped outside of the province and outside of the country. Both facilities follow the same rules and regulations.
Packers slaughter and process the cattle they've purchased. This involves separating the edible parts—such as loin cuts—from the parts that are either inedible or are not typically eaten in North America. The edible meat cuts are then sent to retailers for sale at meat counters and sold to consumers. The other portions of the animal—either inedible or not typically eaten in North America—are either shipped elsewhere or disposed of.
Throughout this chain, the beef is shipped via truck or rail, which increased the costs. Overall, throughout the chain consider this: if trucking costs 4 cents per pound, that cost is applied 4 times to the meat before it reaches the retailers shelves, or each time the meat is shipped.
How does a steer or heifer become beef?
There is a very loose relationship between the price of live cattle and the retail price of steaks on the shelves. At both the packing and retail level, there are significant over-head costs associated with transforming an animal into a meal. The live animal is only the raw material for the end product. Every step that the raw material is handled or processed has a cost and that cost must be incorporated into the final retail cost of the product.
For example, an animal that weighs 1,387 pounds at slaughter would be separated into two parts; the warm carcass, representing 60%, or 832 pounds of the total; and, the residuals and offals, representing 40% or 555 pounds of the total.
The warm carcass will then break down into:
116 pounds—or 14 %—of hip cuts;
152 pounds—or 18%—of middle cuts;
99 pounds—or 12 %—of front cuts;
211 lbs—or 25%—of ground beef;
47 pounds—or 6%—of manufacturing cuts;
and, 207 pounds—or 25%—of waste.
In the end, only 625 pounds of the original 1,387-pound animal will end up on the retailers' shelves.
Packers dispose of the remaining 762 pounds in a number of ways. Of that 762 pounds:
182 pounds—or 24%—of waste
58 pounds—or 8%—of hide;
33 pounds—or 2.3%—of edible offal;
18 pounds—or 2.4%—of edible tallow;
and, 472 pounds—or 60%—of meat and bone meal.
Because of changes brought on by BSE, many of non-meat portions of the animal cannot be sold internationally. Instead, packers are forced to dispose of them. Not only does reduce the potential profit from the carcass, but it also generates additional costs.
What kind of profit is being made on beef?
It is possible to compare the live cattle price and the wholesale price of boxed beef. This calculation will yield a gross margin, but it is important to consider that over-head operating and packaging costs still need to be applied. Gross margin does relate directly to profitability.
This is again true at the retail level. Operational over-head and packaging costs must also be applied.
