“Too Few Options” Continue to Hinder Canadian Agriculture

Making bacon.  That might be buzz phrase about “making money.”  However, if you are a pork producer in Canada its about “making bacon.”  Last week, I had one Ontario pork producer ask me in passing at a social event if I’d like some bacon.  He went out to his truck, picked up three packages of bacon and put them in my van.  I offered to pay and he told me no.  He said it was worthless to him.

Certainly this winter has been one of discontent as our pork sector is taking a punch in the gut from low prices, a high Canadian dollar and too few options.   The first two things on the list we’re used to as farmers.  The last one called “few options” might surprise you, like there is something more relevant than price and that darn Canadian dollar.

Nonetheless, “fewer options” is becoming increasingly relevant within the market infrastructure within Canadian agriculture.  What I’m referring to is something my economist cousins’ call “ologopolistic competition”.  In short, it means competition between very few firms.  In 2008 Canadian farmers are getting backed up right into a corner.  We’ve got that in spades.

We’ve certainly got a problem with that in livestock.  We’ve also got it in the Canadian grain complex.  Simply put, competition for Canadian grains and livestock is shrinking and where its not shrinking ologopolistic market forces are keeping prices artificially low.

Let’s look at livestock first.  In Ontario like elsewhere in Canada we’ve got too few buyers leading to market concentration.  Case in point is the Ontario beef market.  The Cargill plant in Guelph is the price setter for Ontario beef.  As they cut back, options become ever fewer for Ontario beef producers.  If the plant closed or threatened to close it would send the Ontario beef market reeling.

With pork it’s not quite the same but big processors are few and they have their own particular vision of what a hog should be, cheap and grown to their own specifications.  After telling my pork producer friend how much I enjoyed his bacon, he thanked me but went on to say how the big processors had encouraged pork production.  He went on to say that’s a big reason for the current Ontario pork malaise.  They held out promises, promises, and more promises to producers, only to pull back when the barns got built.  According to my pork producer friend, it was all scripted.

Fast forward to the grain those animals eat.  At the present time Ontario corn producers are enjoying high corn futures prices.  However, the Ontario basis is poor, partly because of the largest crop ever produced in Ontario in 2007 but also from “too few options.”  Even more bizarre, we’re importing American corn into Ontario but at the same time, we’re exporting it back to the US.  Sometimes, it’s literally on the same trucks.  If you had just arrived here from Mars, you’d ask, “what’s up with that?”  It surely is a legitimate question.

The answer is murky.  However, it goes like this.  American corn may have been booked months ago, even a year and a half ago, so it’s been in the pipe a long time.  At the same time there is so much “cheap corn” in Ontario, it’s successfully being bid into the Marysville Michigan ethanol plant in forward months.  However, the American corn coming in is keeping the local supply more abundant than it should be thus keeping basis more negative.  What makes it even worse, is some of the American corn goes into the Ontario ethanol plants and is subsidized by the Ontario Ethanol Growth Fund.

The pork, beef and corn examples all scream “too few options”.  In the corn case you can see the deliberate attempt of market players to ensure corn is cheap.  In many ways that is natural ologopolistic behaviour.  However, in most market environments where this happens there is intrusive government regulation so the “fewer firms” don’t take advantage of the consuming public.  However, in agriculture, it’s like “independence day.”  If you can import American corn to keep Ontario corn cheap, just do it.  Just think, if Ontario corn producers had won the corn countervail this kind of market behaviour would have been severely curtailed.

Much of this agricultural market behaviour flies below the radar.  For instance with market prices for grains at the present time quite high, its like saying the cherry on top of my ice cream sundae isn’t red enough.  Nonetheless, that’s what I’m saying.  Yes, government has the power and should play a role in preventing this.  However, whether it’s beef, pork, corn or something else the bigger problem is farmers sometimes don’t even realize it themselves.  The challenge ahead is to be aware of it and someday if the stars align we might be able to do something about it.