Marketing change

by DON STONEMAN & ROBERT IRWIN

It's a development that other farm organizations are watching closely, for the direction that this dispute takes may be followed by their commodity as well. One of them is Chicken Farmers of Ontario, which must submit this month to the overseeing Farm Products Marketing Commission (FPMC) its plan to implement a new marketing structure that the provincial government body is demanding. The commission has ordered changes that will affect the price that farmers get for chicken as well as the amount that is produced.

Like the FPMC order four years ago that forced the Ontario pork board to allow contracts between producers and processors, it promises to have profound effects upon producers, and apprehension is growing. "The pricing issue is to me a huge, huge concern," says Ed Benjamins of Moorefield. "I think it will reduce chicken farmers to contract producers."

In fact, contract chicken production is abhorrent to Ontario producers, well aware that their counterparts in the American deep south are barely able to squeeze out a living contracting production to powerful U.S. processors.

Contracts aren't what some Ontario pork producers want to see either. With more and more pigs going directly to processors, Ontario Pork seems to be working towards putting itself out of a job, says Bob Bedggood, a Thorndale pork producer, cash cropper and president of the Christian Farmers Federation of Ontario.

Things began to heat up in the often-strained relationship between Ontario Pork and Maple Leaf last August. when the packer apparently balked suddenly at signing a so-called platinum contract which the pork board insists was a done deal. Ontario Pork chief executive officer Paul Knechtel wrote in a Sept. 2 letter to Maple Leaf Pork president Pat Jones "that hog characteristics aren't as important to Maple Leaf's pork business as who supplies them."

FPMC losing vision
Neither Pat Jones nor Maple Leaf's normally co-operative public relations firm would talk to Better Farming for this story. However, one can assume Knechtel's comments aren't taken lightly by a company which insists it needs the right to contract directly with producers to ensure it gets hogs which meet exacting specifications. And clearly the trend is moving in that direction. The number of contracted hogs has grown in less than a decade from about 10 per cent of all marketings to more than 70 per cent. (See figure 1.)

In the view of Elbert van Donkersgoed, executive director of the Christian Farmers Federation of Ontario, the role of the pork board has changed, with both it and the chicken board losing their respective roles as "gate keeper" to the product. He senses a fundamental policy shift taking place at the provincial government level. "The FPMC is increasingly losing the vision that it has a public policy responsibility enabling farmers to use the legislation to accomplish things in the marketplace they could never do on their own," Van Donkersgoed says.

The FPMC's vision on the chicken side is that the board will no longer set the price for chicken, nor the volume that it will sell. Processors will now tell key chicken board staff, in confidence, how much chicken they want farmers to grow several months in advance. The board's staff will compile the figures and submit them to the national chicken agency. If the total is higher than the five per cent annual cap allowed on the province's growth, the increase will be doled out to the processors as a percentage of their request.

Rather than the price being negotiated for every crop of chicken, farmers will be paid according to a formula that considers the major inputs -- feed and chicks -- plus a producer margin to cover farmers costs and labour, No longer will the wholesale market price for chicken be a direct factor. The chicken board will also abandon its role on the export side. Producers who wish to export will deal directly with processors.

Tom Posthuma of Dundas, chairman of CFO, has concerns about the provincial order. "Now you have to make a leap of faith that the sum total that everyone is asking for is also the right number needed in the market. It's a fundamental shift in approach, not that it hasn't been tried before."

In 1994, Ontario processors and producers joined together to try to break a logjam at the national level, where provinces couldn't agree on how to divvy up any increase in domestic consumption. Ontario announced it would increase production by 15 per cent and Quebec, the other major chicken-producing province, followed suit. As a result, "the market was quite oversupplied," Posthuma says.

A national allocation agreement now slices up the domestic market. When the agreement was drawn up its signatories "didn't contemplate working under a system like the FPMC has ordered," Posthuma says.

Packers' challenge expected
Ed Benjamins, a former chicken board director and representative to the national agency in 1994, fears that there is a risk of oversupply again. He thinks that processors will want to lower prices after the fact, if the market gets oversupplied, and that, eventually, the chicken board might be eliminated altogether.

Certainly, some connection between processors and farmers is necessary for specialty products. on the pork side, David Wells, who together with brothers Jim and Scott and Domenic Cergua owns Conestoga Packers, Breslau says, "direct contracts with producers are even more important for us than for the big guys." By securing specific quantities of specific hogs, Conestoga, the province's third largest packer, is able to supply niche markets.

Ontario Pork has no intention of being sidelined. Last month it unveiled a series of new proposals to strengthen producers' positions. The board's announcement (on its internet website http://www.ontariopork.on.ca/default.htm) notes that "much has changed in the pork industry," since 1996 when the Farm Products Marketing Commission issued a ruling which mandated direct producer packer contracts.

During the last four years, provincial governments in Western Canada went further, stripping their pork boards of monopoly powers and leaving producers to fend for themselves in a packer-controlled marketplace where private deals make price reporting more a matter of conjecture than fact.

Maple Leaf and possibly other packers will almost certainly challenge Ontario Pork's latest move. If the commission approves the changes it would create a power shift from packers back to the board.

One of the many proposals put forward is that the board would be a signatory to all future "supply agreements involving producers" and packers and have "the right to negotiate all terms and conditions."

The pork board has briefed the newly minted commission chairman Ron Stork, but Stork won't say where he stands. Is there any danger the move could cost Ontario Pork its monopoly powers? "From the commission's standpoint it's too early to say," Stork responds.

Ultimate authority rests with Agriculture Minister Ernie Hardeman who has already been lobbied by a number of industry players. But, says Will Nap, "We've had no inkling that they are even considering doing away with the monopoly powers." He asserts that recently constructed processing facilities in Western Canada have partially hidden the effect of Prairie pork boards losing their monopoly in the past few years. He predicts that will change when supply and demand are more evenly matched. "Their big problem out west is they don't know what the price is."

Ontario Pork reasons one of their new proposals -- restricting "supply agreement" sign-ups and renewals to four periods a year -- will help producers shop for the best deal. But David Wells of Conestoga Packers wants to reserve comment on the pork board's new proposals until he and fellow members of the Independent Meat Packers Association, which represents the provinces' smaller packers, have a chance to review the process. However, he notes concentrating sign-ups to four periods could burden smaller packers who have limited manpower.

"Power imbalance" feared
Since the advent of large-scale multi-site loop systems in the past decade, small pork producers have increasingly worried they will be squeezed out by large players tied in with processors. Producer unhappiness with Maple Leaf Pork has been on the rise since pork prices crashed in 1998. Better Farming has received dozens of calls about the situation from producers, many of whom have contracts with Maple Leaf.

John Nyenhuis of Sebringville, a former president of Perth County Pork Producers Association which represents the largest number of producers of any county in Ontario, is one of the few who will speak publicly. He maintains "Maple Leaf is trying to overturn the board."

Nyenhuis ships his pigs under a contract with Quality Meats, the province's second largest packer. He says he now believes its time to halt his own direct contracting, even though he says Quality has been good to deal with. "Right now I feel I have no choice because I see it (contracting) getting out of hand."

Will Nap agrees. "Producers feel threatened that their access to slaughter space will be controlled through producer-packer contracts and I think that's a real fear." But Don Collis, vice president and general manager at Quality Meats, says his company is "endeavouring to cooperate with the producer organization as best we can." Like Maple Leaf, Quality contracts for more than 95 per cent of its needs but, unlike its giant competitor, it probably buys half its requirements through agreements with Ontario Pork.

For his part, Ken Palen, interim chairman of the Ontario Independent Hog Producers Association (OIHPA), says he is reluctant to comment on the situation with Maple Leaf or about contracting because his group wants to get along with everyone. He emphasizes the importance of the whole industry working together. However, in a paper circulated to its 150 members, OIHPA has warned direct contracting has created a "power imbalance."

In earlier years, most Ontario hogs were sold daily on a Dutch clock auction system. At one time, visitors from around the world flocked to learn about what was considered one of the most efficient hog marketing systems in the world -- a co-operative approach which pooled prices but still rewarded producers for individual carcass merit. Most importantly, proponents said the system gave producers clout in an industry once dominated by greedy truckers and scheming packers.

Public utilities setting
University of Guelph economist Ken McEwan, who recently conducted a series of producer focus groups sponsored by the pork board, feels producers can succeed with or without contracting. In his survey, which involved between five and eight producers at six locations across the province, McEwan encountered more complaints about Ontario Pork from large producers than small ones and he found that many large and small producers don't understand the board's functions and services.

He recommended the board find ways to improve services like settlement, marketing, research and lobbying for both large and small producers. McEwan also points out there will always be producers who oppose the board regardless of its actions.

On the chicken side, few producers are speaking up yet. Jim Judge, a principal in Farm Fresh Co-operative, a producer-owned processing plant in Harriston is uneasy about the new plan. He says the FPMC's method of divvying up new production will limit their growth drastically.

Tony Taveres, chief executive officer of Maple Lodge Farms, agrees that the FPMC appears to be headed partway towards American-style contracting. Like producer Ed Benjamins, Tavares expects "market chaos" under the FPMC plan. He isn't sure that it will work because there aren't the same constraints on expansion as there are in the U.S. processing industry, which runs at full capacity all the time and must invest heavily in infrastructure before it moves ahead.

Moorefield's Benjamins wonders if the new plan will result in plant allocation quota, as in the dairy industry, and if small independent plants will be closed as they are bought up by larger players to get access to chicken.

Van Donkersgoed says the provincial government's marching orders appear to turn chicken production into "a public utility" with farmers producing food on a cost-plus basis with "a certain slice" for management and labour. "I wonder if family farm entrepreneurs are going to be comfortable in a public utilities setting," van Donkersgoed says.

In spite of its misgivings and questions, the chicken board had better have those proposals on Rod Stork's desk on Feb. 8, the chairman of the Farm Products Marketing Commission says.