question for SH

[agman]

If I were a betting man, I would bet that, in the long run, Tyson and Cargill will have a lot of cattle being produced on contract, plus they will continue to use marketing agreements. Contracts really aren't all that new, and they provide stability of supply. Stability of supply is very important to a company who wants to tie production programs to processing capacity and value-added marketing programs. The key here is maximum efficiency and productivity of assets employed. They have thought this way too long to quit now. I personally believe that they are moving slowly because that is what they have to do in beef, but they are moving in the direction described above. Look for broiler contract growers who also have cow-calf herds to become very interested before too long. Ask yourself, "If I wake up tomorrow and find that this system is now in place, what will I do?" Maybe they will have to get the law changed, but I still think this will happen.

You hit the bullseye on this one-my compliments to you. It is forward thinking producers who will move forward with these contracts because of inherent benefits to them. The naysayers are falling farther behind the curve everyday.

 

[Jason]

Oh my goodness, a contract that allows me to raise cattle at a garanteed profit!!!!! Who would ever want that?

The truth is the more people that get contracts like that, the better their standard of living becomes. You can actually budget, know what you have to spend. Can determine if you can afford to expand or not. If you know how to keep your costs down and maintain quality, you can get ahead of the crowd.

 

[Econ101]

Oh my goodness, a contract that allows me to raise cattle at a garanteed profit!!!!! Who would ever want that?

The truth is the more people that get contracts like that, the better their standard of living becomes. You can actually budget, know what you have to spend. Can determine if you can afford to expand or not. If you know how to keep your costs down and maintain quality, you can get ahead of the crowd.

That is the beginning pitch, Jason, but that is not what really ends up happening. All of the producer surplus is eventually handed over to the meat processor with their increased market power. It has already happened in poultry, is happening in pork to a large degree, and the more people like you believe what they say, the more it will happen to the cattle industry. The profits off of owning the assets will be expropriated to the processing company. That is the real problem with the Pickett decision from an economic standpoint.

 

[blackjack]

...Jason...most farmers have already cut back on their expenses to such a degree ...there is less money to pay labor ... less to invest back into machinery ,buildings,land...etc... go ahead make your contracts with the big boys... you might not control your destiny as much as you think when it is all said and done... :wink:

 

[Jason]

A producer that owns his land and cattle has the choice to sign a deal or not. Those that have no idea what their costs are will have the problem.

I have visited with several who have entered contracts for pork and chicken, all of them like the arangement. Some are new to it, some have done it for years. All of them have better cash flow than I do.

As a purebred breeder I have offered contracts for bulls to major ranches. They had the idea they would have to pay thousands for good bulls. The ease of sale and volume make it actually cheaper to buy good bulls than raise their own. The trouble is most of these places have never figured out the actual costs involved. I know my costs and what I need, I would never offer to sell at a loss or at a break even.

Many ranchers wait for their calf cheque then spend till it is gone. Some do well because they have more cows than wants, huge land bases inherited or whatever, so cash expenses are low. Others that do the math realize the land base is subsidising their operation.

What happens when these large land bases are sold off for development or because of the death of the rancher? They can't be bought by cattle money, they have to be subsidised by business income or tax monies. If the tax structure changes there will be less investment in cattle.

To attract a new generation of rancher, it has to be approached as a business. To go into a business and be at the mercy of the typical cattle cycles is stupid unless you have some control over your downside, or income.

Operations are getting bigger and will continue to do so as this affords economy of scale, and limits the effects of drought or other disasters on an operation. The costs have been addressed, the income is next.

If in some wild twist, income from beef products was to increase significantly, other major players would be looking at capturing some of that profit and would offer contracts that would pay more for the cattle needed to make that value added profit.

Right now too many people just get into cows for tax reasons, or because they think they want to, and they don't really have a good business plan. They don't realize the beef their cattle produce has to be consumed somewhere. Right now feeders make the most off people like that.

This industry is changing, no one will stop that. Those that fight to stay status quo will be passed by.

 

[pointrider]

Thanks for your comment, Jason. We realize that you were speaking kinda tongue-in-cheek, although you probably really do believe that working within a contract program may not be too bad. But here's another point I would like to bring up for everyone to consider. And this is based on my personal knowledge of how quite a few contract programs have been administered through the years.

Whether a producer is independent or on contract, he or she will only survive if he or she is an efficient, progressive, proactive, forward-thinking and innovative producer. With respect to independent producers the total mix includes marketing. Not so with contract producers. So, the mix is a little different for the two categories, but the basics remain the same. Efficiency, progressive, etc.

In commodity agriculture, there is a Top Third, a Middle Third and a Bottom Third (always) in terms of profitability. The Top Third, as a rule, is the only group that makes money on a consistent basis. The Middle Third breaks even, and the Bottom Third loses money. As producers drop out, the groups rearrange a little, and new thirds are created thus perpetuating the competitive battle. This variation in profitability is the primary reason for consolidation (fewer and larger) through the years. Also, as a rule, while the average size of production operations may be increasing due to consolidation, the thirds continue to contain both large and small operations.

Being a large operation does not guarantee a spot in the Top Third. Once again, all three thirds tend to contain large operations, medium-size operations and small operations. The primary basis for ranking is a combination of efficiency, innovation and execution of the game plan.

Now, here's the part that may surprise some of you. Within a company's contract operation, it basically works the same way. You have to be a determined, efficient producer to stay in the group. Why? Because the company doing the contracting (usually the one doing the processing and marketing, also) has to compete, too. The company wants to make sure it is doing everything it can to keep the cost of production as low as possible while obtaining good to top quality from the contract farms.

The way a lot of them do this is to do something like this. They will say to their producers, "We are going to rank you each year on such things as mortality, feed conversion and achieving market weights within the time period allowed. If you rank in the bottom 10% of the producers your contract will be cancelled, and you are on your own with respect to your buildings and equipment."

Some may think this to harsh for a contract program, but what if those guys really were lousy producers who went fishing too often and just didn't do a good job? If you were a contracting company, would you want them producing for you? I don't think so.

The point is, folks, that no matter if you are independent or on contract, you have to do a good job or you are not going to survive. Some of you may say, "Well, if I have to do more than this (-------) then I don't want to be in the game any more." And that's fine. You may have perfectly good reasons (family goals and values, etc.) for imposing limits on your efforts. But it's still going to happen. You need to be ready at all times to do the very best you can do, or have your next stop in mind for the day when it is necessary.

I'd like to hear from you. Thanks for your time.

 

[Econ101]

Good points, Pointrider. There is another element in the type of contracting that is going on in today's agriculture and it doesn't have anything to do with real efficiency, it has to do with the company maximizing its profits by differentiating and then discriminating--not on the product they buy from their producers--but with other exogenous reasons. It has the effect of capturing the producer surplus (profits generated in the business).

Jason, do not get all contracts mixed up in the same bag. There is a real difference between the kind of contracts you talk about and contracts with some of these giant agribusinesses that have an element of market power in them. Your small operation may gain efficiencies from contracting, but it will never have the bargaining power necessary to manipulate markets from their natural supply/demand equilibrium. BIG difference. I would never argue against your right to contracting in your situation. Contracting is just a more formal business relationship.

The problem happens when you do not have the ability to contract with anyone else because of a monopsony or oligopsony (one or a few buyers).
Suppose you could only contract with only one or a few buyers. Suppose there was no other way for you to sell your product (bulls). Then you could be a victim of market power. Let us suppose that at first you sold your bulls for $3,000.00 and you provided 500 bulls per year at that price. The buyer could drive your profits out of your business by paying you less and less. You would have no other option than to sell to the monopsonist and your profits would go down. Let us suppose that the monopsonist drove your prices down to $1,500.00 per bull. You are not making any money at this price but at least you have not lost your farm. You work for little to no profit. As a matter of fact, if fixed costs of the farm were included you would lose $100.00 per bull. Your total money you make from your business venture went from $1.5 million (3,000x500) per year to $750,000.00 per year ($1500x500) and you really lost $50,000.00 per year. The lowest theoretical point you would go is the average variable cost, which does not include profit. You might even have to refinance your farm a couple of times to take equity out to stay afloat and keep from losing everything.

Now let us suppose that the monopsonist wanted more 30 more bulls because some of his bulls were killed by lions, tigers, or bears. He could not go to you and get anymore because you are already smart enough to know you are not making any money. You tell him he would have to pay you the $50,000.00 per year you are losing and the $3,000.00 per bull extra. This is a total of $140,000.00. Now suppose the monopsonist went to another rancher and told him that he would pay him to get into the bull selling business and pay him $3,000.00 per bull to provide 30 bulls. He could then pay the new entrant $90,000.00 ($3,000x30) to get the new bulls and then eventually do to him what he did to you. Was the second farmer any more efficient than you? It sure cost the monopsonist less money to go with the new rancher.

This little trick happened time and time again by the smart monopsonists of the 1800s. That is why we have the Clayton, Sherman, Robinson-Patman, and Packers and Stockyards Acts. It is to prevent people with market power from taking all of the value the market produces for themselves and cheating farmers like you. Read Section 202 of the P&S and see how the law would apply to this situation.

 

[Jason]

Econ, with all your double talk and $100 words, you display a lack of common sence.

I said no one that knows their costs will sign a contract at a loss. PERIOD.

You then go on to describe some of the growing pains of the 1800's.

The future will belong to those who know how to assess their costs and make ways to cover them.

It is the problem of the processor to make sure he/it knows the costs involved there and to make a profit.

Tyson, Swift, Cargill, and others so far have displayed that ability. To suggest they would purposely try to drive ther suppliers out of business is ludicris. They might feel pressure at some point, IF THE CONSUMER STOPS PAYING, to lower their offer to a supplier. However, if suppliers ever were to talk and one found out he was being paid less than another for the exact same specifications, that could be a basis for a lawsuit based on the PSA, of unfair treatment. Smart producers will have that in the contract.

The incentive for one big company to treat you well is that another one is waiting for the best producers, and will bid more if that is where the profit is.

The ONLY situation where a business in our competative society could keep paying less and less for the same product under the same circumstances is if there are too many suppliers of a said product. IE cows being raised for the tax break.

Pointrider, the only way a company is going to cancell the bottom 10% is under the same above circumstances. They have to replace production to run at their designed capacity to remain efficient.

Anyone that signs a short contract and builds an operation on a 10-15 year borrowed money business plan is a fool.

 

[Econ101]

Econ, with all your double talk and $100 words, you display a lack of common sence.

I said no one that knows their costs will sign a contract at a loss. PERIOD.

You then go on to describe some of the growing pains of the 1800's.

The future will belong to those who know how to assess their costs and make ways to cover them.

It is the problem of the processor to make sure he/it knows the costs involved there and to make a profit.

Tyson, Swift, Cargill, and others so far have displayed that ability. To suggest they would purposely try to drive ther suppliers out of business is ludicris. They might feel pressure at some point, IF THE CONSUMER STOPS PAYING, to lower their offer to a supplier. However, if suppliers ever were to talk and one found out he was being paid less than another for the exact same specifications, that could be a basis for a lawsuit based on the PSA, of unfair treatment. Smart producers will have that in the contract.

The incentive for one big company to treat you well is that another one is waiting for the best producers, and will bid more if that is where the profit is.

The ONLY situation where a business in our competative society could keep paying less and less for the same product under the same circumstances is if there are too many suppliers of a said product. IE cows being raised for the tax break.

Pointrider, the only way a company is going to cancell the bottom 10% is under the same above circumstances. They have to replace production to run at their designed capacity to remain efficient.

Anyone that signs a short contract and builds an operation on a 10-15 year borrowed money business plan is a fool.

Read my example, Jason, or you will repeat the same mistakes history teaches. The first bull seller did make money in the beginning. After that he had to keep going down by the power of the monopsonist (I know it is a big word but I did explain the meaning of it). You can be fooled if you want by the arguments SH and Agman make but don't require everyone to be as foolish as you.

 

[Anonymous]

Great posts Jason!

You are exactly right.

My brother-in-law raises contract hogs and he says he'd never go back to riding the market waves of volatility. To compensate for tighter per head margins, he has increased his production. Either way, he is still guaranteed a profit if he holds up his end of the bargain. I think back to all the feed pails I carried and straw I spread only to give the feeder pigs away. "BY GOLLY, I WENT BROKE RAISING HOGS BUT I WAS INDEPENDENT". LOL!

To remain a consistant supplier in any contractual arrangement, you have to live up to your end of the bargan as in most business arrangements.

As far as "doomsday profits" like Econ. they would lead us to believe that Tyson and Cargill will control the producer when in fact vertical integration is going in the opposite direction with USPB leading the way. What I see is a day when progressive producers will contract their cattle to Tyson and Cargill to custom kill them. If Tyson and Cargill get too greedy, the producers will kill and process their own cattle. Talk about a win-win situation.

While Econ. stands on his soapbox and tells everyone how they are all doomed and how the sky is falling, progressive producers are controlling their financial destiny and have the proof in the bank. Eventually they go to Econ's farm sale and buy him out.

This is just one more topic that Econ. doesn't have a clue about.



~SH~

 

[Jason]

For your example to have merit, a Monopsonist would have to exist. The PSA would have to be repealed, and businessmen would have to be stupid.

There is no way a contract can be signed then profits be driven out from the producer.

Remember common sence? True businessmen will not allow an all powerful monolpoly to exist. Competition prevents that from happening.

You have admitted competition in your debates with SH.

Even if we were down to 2 players, the market still drives the price. Consumers have all the power. Every cent that comes to the processors and producers comes from consumers.

FYI I never said I didn't understand your $100 words, just that you use them to try to gain importance inyour posts and to confuse the issue.

 

[Econ101]

Jason, it happens every day in Tyson's poultry operations. In most poultry operations in the United States there is a geographical monopsony or in some cases an oligopsony. Those farmers are being driven down to their variable costs while record profits are being made by Tyson in that sector. Tyson does not compete for those farmers with other companies due to geography.

Market power can be exerted with oligopsonies (which more accurately describes the cattle industry). Pickett proved it to 12 jurors.

There is no debate that the price of all cattle went down due to the captive supplies and its cause was the abuse of the market power it leveraged. When the price of all cattle went down -even captive supply cattle- due the buying behavior of Tyson, it was a movement down and along the supply curve. Tyson benefited from this movement, not so much in beef, but in its poultry operations.

If there are but two competitors, it can be to the advantage of both to allow the each of them to not compete for the same supply and both get a lower overall price. When that happens it is collusion. The PSA does not require a plaintiff to prove both. One is sufficient to break the act as the law says "or" instead of "and". Pickett proved it to the 12 people that counted. Judge Strom was not one of the 12, and neither was Cebull. They both claimed, based on the London case, that the law should read "and" which was legislating from the bench. They were wrong. We have a separation of powers in the United States, what do you have in Canada? They did not claim that the PSA was unconstitutional, they just legislated from the bench based on an equally erred ruling from their own court.

 

[Jason]

Jason, it happens every day in Tyson's poultry operations. In most poultry operations in the United States there is a geographical monopsony or in some cases an oligopsony. Those farmers are being driven down to their variable costs while record profits are being made by Tyson in that sector. Tyson does not compete for those farmers with other companies due to geography.

Says you. Where is the outrage by poultry producers? Have those who are smart enough to sign contracts that protect them complained?

Market power can be exerted with oligopsonies (which more accurately describes the cattle industry). Pickett proved it to 12 jurors.

Pickett proved it to 12 jurors that wanted to believe all big corporations were evil. None of them had much business background, or any cattle background. the judge set the verdict aside and then on review was reaffirmed he was right to do so.

There is no debate that the price of all cattle went down due to the captive supplies and its cause was the abuse of the market power it leveraged. When the price of all cattle went down -even captive supply cattle- due the buying behavior of Tyson, it was a movement down and along the supply curve. Tyson benefited from this movement, not so much in beef, but in its poultry operations.

There is in fact debate on this issue. Cattle prices rise while captive supplies are still at similar levels. Why is that?

Now you would have us believe Tyson would sacrifice beef profits to make chicken profits? That is stupid. Smart business says they will continue to make money at each enterprise. Any successful business knows you can't continue to subsidise one aspect of your business with profit from the other. If they did that they would be ripe for the picking in the chicken or beef side of things as they would obviously have serious flaws in efficiency in one or the other.

If there are but two competitors, it can be to the advantage of both to allow the each of them to not compete for the same supply and both get a lower overall price. When that happens it is collusion. The PSA does not require a plaintiff to prove both. One is sufficient to break the act as the law says "or" instead of "and". Pickett proved it to the 12 people that counted. Judge Strom was not one of the 12, and neither was Cebull. They both claimed, based on the London case, that the law should read "and" which was legislating from the bench. They were wrong. We have a separation of powers in the United States, what do you have in Canada? They did not claim that the PSA was unconstitutional, they just legislated from the bench based on an equally erred ruling from their own court.

Pickett proved nothing. He lost. There was no collusion. There was no manipulation. There were contracts that are entered into by both buyers and sellers willingly. Cebull has no bearing on Pickett as he is from an entirely different circuit, and he was shot down by a review of his peers too.

You still are barking about things that happened in the 1800's and are against the law today. If anyone could show where the big players get together and set an arbitrary price they would win in court.

The price/profit in cattle is a function of the supply of beef sold at what price to the consumer, less costs associated in getting it there. The most efficient ones in the chain will make the most while the least efficient will set the market provided supply is abundant. If supply is tight, the efficient ones will best be able to bid highest for limited supplies. If that situation continus for too long businesses close, the least efficient first.

 

[ocm]

Econ101--You may feel free to correct me on details of what I'm going to say but I believe the gist of it is correct.

In Texas if you want to start a contract chicken business (to sell chickens to somone like Tyson) there are only two or three banks that will loan you the money. They all insist on a contract between you and Tyson ( or whatever other processor). This small handful of banks also finance the processors. They all refer you to the same lawyer to write the contract (between you and Tyson). You don't agree, you don't get any money to make your considerable capital investment.

YOU have no flexibility in the contract. You take it or leave it.

YOU make the capital investment. (SBA may guarantee the loan)

YOU do not own the chickens.

The contract says Tyson will provide you with chicks which you will raise.

If everything goes as it usually does for the first few months, you will make money and you will make payments to the bank.

If Tyson has an oversupply of broilers, they may wait a week or two before delivering new chicks to you. You have a couple of weeks of no production. This lessens your profit.

They provide you with defective chicks. They say they did not. You raise them anyway. They perform poorly. You lose money.

They wait three weeks to give you chicks this time. They provide them in a timely way to their best performing contractors.

Tyson wants to change the pricing on the contract. You don't want to. You know that if you don't, you will get more sick chicks and delayed deliveries. You agree to the change, even though at best you will make very little money.

Tyson tells you that you need to upgrade your facility in order for them to send you more chicks. The contract says that it is your obligation to keep your facility in the best condition.

You see at this point that this could get you in deeper. You would like to get out.

Do you just quit--Can't, you owe the bank too much.

Do you sell--Can't cover the loan, because the property is worthless without a chicken contract and Tyson won't give one to a new owner without upgrades.

Do you sue----Can't, there is a binding arbitration clause in the contract that prevents you from taking them to court. You can only go to a professional arbitration firm to settle the dispute. Tyson will choose the arbitration firm.

It looked good when you started, but now what are your choices? Do you have the same choices you did when you started? Is anybody who signs in the first place stupid?

 

[Econ101]

Econ101--You may feel free to correct me on details of what I'm going to say but I believe the gist of it is correct.

In Texas if you want to start a contract chicken business (to sell chickens to somone like Tyson) there are only two or three banks that will loan you the money. They all insist on a contract between you and Tyson ( or whatever other processor). This small handful of banks also finance the processors. They all refer you to the same lawyer to write the contract (between you and Tyson). You don't agree, you don't get any money to make your considerable capital investment.

YOU have no flexibility in the contract. You take it or leave it.

YOU make the capital investment. (SBA may guarantee the loan)

YOU do not own the chickens.

The contract says Tyson will provide you with chicks which you will raise.

If everything goes as it usually does for the first few months, you will make money and you will make payments to the bank.

If Tyson has an oversupply of chickens, they may wait a week or two before delivering them to you. You have a couple of weeks of no production. This lessens your profit.

They provide you with defective chicks. They say they did not. You raise them anyway. They perform poorly. You lose money.

They wait three weeks to give you chicks this time. They provide them in a timely way to their best performing contractors.

Tyson wants to change the pricing on the contract. You don't want to. You know that if you don't, you will get more sick chicks and delayed deliveries. You agree to the change, even though at best you will make very little money.

Tyson tells you that you need to upgrade your facility in order for them to send you more chicks. The contract says that it is your obligation to keep your facility in the best condition.

You see at this point that this could get you in deeper. You would like to get out.

Do you just quit--Can't, you owe the bank too much.

Do you sell--Can't cover the loan, because the property is worthless without a chicken contract and Tyson won't give one to a new owner without upgrades.

Do you sue----Can't, there is a binding arbitration clause in the contract that prevents you from taking them to court. You can only go to a professional arbitration firm to settle the dispute. Tyson will choose the arbitration firm.

It looked good when you started, but now what are your choices? Do you have the same choices you did when you started? Is anybody who signs in the first place stupid?

Thats what my chicken sources say. Only they are a lot more slick than that.

 

[Econ101]

Jason, Who does Canada sell its boxed beef and live cattle to besides the U.S.?

 

[rkaiser]

Answering Econo 101 question -

80% to the USA - 13% to Mexico - 4% to Hong Kong\Macau and the rest to Pluto.

Keep going Jason, show us how Canada's fully functioning competitive market allows for an 83 cent Canadian fat market this week.
Pathetic. :roll:

 

[Anonymous]

Kindergarten Economics: "There is no debate that the price of all cattle went down due to the captive supplies and its cause was the abuse of the market power it leveraged."

Kindergarten your ignorance absolutely screams. To makes such a stupid suggestion is to say that the only factor playing on market movements is captive supplies. Are you really that stupid?

You are basically saying that consumer demand for beef and beef by products, both domestic and foreign has no impact on the market. If the market goes down it's captive supplies not increased supplies or reduced demand.

You have left absolutely no doubt that you are totally ignorant of cattle marketing issues.


OCM,

Do you now believe that you have to save the chicken farmers from themselves too?

Chicken farming is not cattle ranching.

You can't confine beef cows and run them as efficiently as you can on pasture. It's another "apples to oranges" comparison.


~SH~

 

[rkaiser]

What's your take on the 78 - 84 cent Canadian Fats this week SH?

Don't we have an open border with 82 cent American fats?

Can't realy BLAME this on Rcalf can you?

 

[Econ101]

Answering Econo 101 question -

80% to the USA - 13% to Mexico - 4% to Hong Kong\Macau and the rest to Pluto.

Keep going Jason, show us how Canada's fully functioning competitive market allows for an 83 cent Canadian fat market this week.
Pathetic. :roll:

Even if we were down to 2 players, the market still drives the price. Consumers have all the power. Every cent that comes to the processors and producers comes from consumers.

Jason--

Even if we were down to 2 players, the market still drives the price. Consumers have all the power. Every cent that comes to the processors and producers comes from consumers.

By Jason's logic, there are two other buyers for Canadian beef than the U.S.

I guess there is enough competition for Canadian cattle already, so why should the U. S. market be opened for boxed beef or live cattle? What is all the fuss about market power?