Are We Taking Advantage?

Lately there has been a lot of controversy in the farming world (both in real life and on social media) about the current status of drought conditions in Canada. Posts and stories about donated hay from other provinces to Alberta have led to divisive discussions about the economics of farming and the inherent nature of being in a commodity-driven business environment. So it leads me to ask the question, “are farmers taking advantage of one another?”

Let me preface this post by saying that I’ve always been a staunch believer that farming IS a business.  Heck, I interrupted writing a post about why I made a business decision about farming 10 years ago, to turn my attention to this post because the thoughts just started to flow.  I am a farmer; I also hold an off-farm job in senior management, and spent several years managing a consulting business that I started from scratch and grew to a multi-million dollar annual revenue earner.  Because of my belief that farming is a business, I treat it as such.  Unfortunately, in my experience, not all farmers do.  I’m not saying most farmers aren’t excellent in this respect or don’t consider business implications.  However, it appears that there are farmers who view farming as a lifestyle (the “in my blood” argument) or even go so far as to pride themselves on running their operation as the antithesis to a business because, after all, who wants to be seen as running a corporation on a farm these days?!

Which brings me to what is now the latest controversy swirling around farming, at least in my locale: drought 2015, the impact it has had on commodity prices, and how some farmers are impacted by those prices.  Seriously, is it not enough that we have to deal with animal rights activists, the anti-GMO movement, a sagging global economy and trying to differentiate our product? Well, welcome to farming. Just when you thought you were in the clear, there’s always something (or someone) to pile on. Queue Mother Nature, usually.

Agvocates on one side of the argument will politely state that farmers should be pulling together and supporting one another. Agvocates on the other side say that agriculture is a commodity-driven business that operates under the most basic of economic principles – supply and demand – and that when there is a high demand and a short supply, profits should increase accordingly.  So where does my belief lie? Well, to be honest, I’m firmly in the middle.  This doesn’t mean that I’m sitting on the fence; this means that I believe there is a compromise between blatant capitalism and agricultural socialism.  I have this belief based both on my farming and my “other world” business experience.

Farming is a commodity based business.  I’ve written about that in the past (So, you want to be a Farmer…? ). So yes, when global demand is high, or supply is low, commodity prices reflect accordingly.  It can absolutely suck at times, but when the market is high, you prosper.  And those farmers who run their farm like a business react accordingly: they reinvest the profit into their business; they pay down debts; they distribute some of the surplus to their shareholders (ie the farmer and his family); they use the profit to increase the size of their business; or they build a contingency fund to cover operations when profits are low (remember, commodities go up and down!).  So with that in mind, I agree wholeheartedly with the camp that argues that increased prices should be in effect when supply is low or demand is high. After all, it is economics 101.

Where I differ in this view, however, is about how high we should be setting prices. I know that price gouging is a dirty term, and nobody would want to be seen as doing that, but if we consider it in the context of business I hope it provides some clarity.  Right now, people in Alberta are buying hay bales at auction markets for prices in the range of $240-300 per round bale (roughly $0.16-$0.20 per pound).  When you purchase at an auction, the buyers set the price. So many are making the correlation that the market price for hay must be in that range. After all, people are willing to pay it, are they not?  To put things in perspective, last year we sold hay for $0.04 per pound which means that hay this year, at the high end of the market, is selling for 4-5 times what it sold for last year.  Based upon the assumption that there is 4-5 times less actual supply of hay this year than there was last year, doesn’t this principle just make sense?  Here’s the thing. High prices are driven by consumer desperation. They are not sustainable. I know people who will spend $5000 on surgery for a $50 dog or cat (or goldfish). Clearly, their decisions are not being driven with a business mindset or with economic principles in mind. This is often the case at auctions or for people who have sentimental attachments to their livestock, or, (God forbid) when people are farming who aren’t looking at farming as a business!

So what about the argument that buyers should be able to absorb $250 hay because beef cattle prices are near historic highs and calves are worth $1500 each?

  1. Not everyone who needs hay has cattle. People have goats, sheep, bison, llamas, elk, horses… These markets are not at historical highs. Heck, some are at historical lows!
  2. Would people be using this argument if cattle prices weren’t high? No, because it would be invalid. Hence, it’s an argument of convenience, used to support a thesis.
  3. There is only so much hay/forage available. It’s simple. If the demand is the same as last year but the supply is cut to 20% of last year, the supply simply cannot support the demand. No matter how high we artificially set the prices.  These aren’t the latest iPhones we’re talking about here. It’s not like there are 1 million of them and 5 million people who want them and 4 million people will end up disappointed but still surviving.  Alberta has over 40% of Canada’s beef herd, with over 5 million head in 2014.  If there is only enough feed to supply a portion of that herd, that means the remainder of that herd must go (sold, slaughtered, etc.)
Distribution of Alberta's cattle herd (2011)
Distribution of Alberta’s cattle herd (2011)
Alberta's Standard Precipitation Index (July 31, 2015)
Alberta’s Standard Precipitation Index (July 31, 2015)

So what does all this mean? Why can’t farmers who get beaten down in years of low commodity prices and low profits (or even losses) capitalize on a year of artificially high prices?  It comes down to one word: sustainability.

These artificially high prices are at the expense not to the consumer, but to other producers.  Sure, this year the people selling hay might be happy. But when herd sell-offs become imminent and the herd size is reduced, that decreases the demand for other products (feed wheat, barley, corn, etc.) and how do you think that will play in future years? As an industry, we’re shooting ourselves in the foot.  We need to remain sustainable and that means that we need the demand side of the equation to support the supply side, and vice versa.  Drastic changes in either side of the system upset the balance, which throws the entire system off the rails.  Sustainability also has to consider operations over a long period of time. While this year there are drought conditions (and several municipalities declaring states of agricultural disaster) that doesn’t mean that everything will get good with the world again in 2016 or beyond. Prolonged drought, floods or other severe weather could provide a multi-year deficit impact to the agricultural community.  So my argument is that drastically increasing prices in 2015 is short-sighted.

Finally (thank you for reading this far) there is a simple business principle that holds true in any business: the secret to sustainable business, which includes tempered long term growth, is to have a solid, repeat base of customers. Now I don’t know about you, but if my regular feed supplier whom I had been dealing with for the past 5 or so years suddenly jacked my prices by 4-5 times in response to the market, I’d be looking for a new supplier really really quickly. And then, when prices were back down, would I reward his lack of loyalty with my loyalty by going back? Perhaps I may, but you can bet I’d have 4 other options on speed dial.  Strong, sustainable businesses are based on customer loyalty (think Coca-Cola, Microsoft, Apple) – the loyalty can be to a product, to a brand or even to the business operator.  So if I want to operate a sustainable agricultural business, am I better off to chase top dollar on the market or to honour my existing customer base?

If you’re an agricultural producer, that last question is one you need to answer and ultimately, it’s an answer you need to be comfortable with, however you choose to operate.  I’m not condemning anyone for choices they make in their business because it is their business, not mine.  I will run my business the way I see fit and you should run yours the way you see fit.  But at the end of the day, we are an industry. We are here to support each other and to supply the world with food.  After all, there’s 7 billion people counting on that.

Full disclaimer: in the spirit of preparedness (see my post on emergency preparedness titled “Are You Prepared?”) I retained approximately 60% of my required annual feed from last year because I had a surplus.  I was fortunate to be able to do this for my horse breeding operation; for our cattle operation we were able to retain approximately 10-20% of the annual requirement. We have long-term supply deals with several neighbours based on the forage standing in the field – we assume all of the risk for getting the hay from grass to bales – and they have honoured those long-term deals with modest increases in the rental rate (not 4-5 times last year’s rate, for sure).  If we had hay to sell, we would be setting our price at $80-100 per bale (roughly $0.07 per pound). Ultimately, we believe that we can continue to sustain and grow our business, even faced with difficult challenges this year.

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