Appendix 2 BC Chicken Growers Association Chicken Pricing Proposal BC Chicken Marketing Board Abbotsford, BC April 15, 2016
Purpose To follow-up and elaborate on the Growers request for the 1. Board to regulate catching costs. To outline the problem currently facing chicken growers in 2. BC; and To propose options to address the problem 3. Chicken Pricing Options Draft 04/11/2016 2
The Problem 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. Chicken Pricing Options Draft 04/11/2016 3
Catching Costs 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) Chicken Pricing Options Draft 04/11/2016 4
Supplemental Research 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) Chicken Pricing Options Draft 04/11/2016 5
Findings - Cost Competitiveness of BC Chicken Production 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)) Chicken Pricing Options Draft 04/11/2016 6
Findings - Grower Returns Study 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 2 nd lowest ($0.72) after Ontario Levy – BC 2 nd 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 Chicken Pricing Options Draft 04/11/2016 7
Findings - Stocking Density Chicken Farmers of Canada Animal Care Program requirements Normal stocking density limit of no more than 31 kg/m 2 Farmers may stock between 31 kg/m 2 and 38 kg/m 2 if additional requirements are met regarding record keeping and flock monitoring. BC maximum density set at 32.5 kg/m 2 Other provinces maximum 38 kg/m 2 Impact 6.34 cents/kg higher cost to BC producers Chicken Pricing Options Draft 04/11/2016 8
Findings - BC Chicken Cost of Production Defined – “the total sum of money needed for the production of 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.” Chicken Pricing Options Draft 04/11/2016 9
Findings - BC Chicken Cost of Production 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 Chicken Pricing Options Draft 04/11/2016 10
Findings - BC COP versus Ontario 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. Chicken Pricing Options Draft 04/11/2016 11
Findings - Stocking Densities BC stocking density Maximum of 32.5 kg/m 2 with animal care program requirements Other Provinces Maximum up to 38 kg/m 2 with animal care program requirements BC at up to 6.34 cents/kg cost disadvantage For a 1,875 m 2 (20,000 ft 2 barn) 38 kg/m 2 would hold 71,000 kg of production 32.5 kg/m 2 would hold 61,000 kg of production Chicken Pricing Options Draft 04/11/2016 12
Findings - BC Turkey Industry Pricing 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. Chicken Pricing Options Draft 04/11/2016 13
Research Conclusions - BC Disadvantaged 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 Chicken Pricing Options Draft 04/11/2016 14
Problem Restated 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 Chicken Pricing Options Draft 04/11/2016 15
Options for Consideration - Status Quo 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 other 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 Chicken Pricing Options Draft 04/11/2016 16
Options for Consideration - Modified General Order Formula 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 Chicken Pricing Options Draft 04/11/2016 17
Options for Consideration - Processor Paid Catching Costs 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. Chicken Pricing Options Draft 04/11/2016 18
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