Friday, September 23, 2016

Did Bill 6 destroy Western Feedlots? Probably not.

One of the bigger Alberta news stories last week was the announcement that Western Feedlots will close by early 2017. At three sites, Western Feeders employs about 80 staff and has the capacity to finish 100,000 cattle. According to the company’s announcement:
Western’s shareholders chose this course of action due to the current high risk/low return environment in cattle ownership, which is inconsistent with shareholder objectives. In addition to strong headwinds in the cattle industry, the poor political and economic environment in Alberta are also contributing factors to this decision.
The major factor that appears to be driving this closure is a significant decline (~30%) in the price of slaughter-weight cattle. A fed steer brought in about $3000 last year and now sells for $2000.

Basically, a shortage of cattle drove up prices over the past two years. Producers responded by increasing the supply and, consequently, the price dropped (there are other factors at play but this is basically micro-economics 101). The lag time involved in finishing cattle means that feedlots are now forced to sell finished cattle at a significant loss (one number I saw was $500-600 per head).

Western Feedlots noted it will be maintaining its equipment. This suggests the operation may re-open when economic circumstances change. Indeed, a temporary closure may be the most sensible option available: as long as prices keep falling, feedlots will keep taking losses.

There has also been significant speculation that Alberta’s recent changes in labour law and its intention to introduce a carbon levy have also contributed to the closure. The company itself as much as said this with its mention of a “poor political and economic environment in Alberta”. The argument goes that the industry has low profitability (averaging $18/head or somewhere around 1%) and thus has limited capacity absorb cost increases.

The Alberta Cattle Feeders Association is estimating the carbon tax will add $6-7 in cost per head. The only certain cost of providing agricultural workers with basic employment rights are WCB premiums. These sit between $2 and $3/$100 of payroll (I can’t estimate the per head cost because there are too many unknown variables). There may be other costs depending upon the government’s decisions around what portions of the Employment Standards Code and which occupational health and safety rules apply to farms, but none of that is clear.

Edit: The Herald published a story Friday night where one operator estimates WCB costs at $2/head and overall profitability at $20-$30/head.

I’m increasingly sympathetic to the cost-price squeeze faced by commodity producers. That said, I’m pretty skeptical that closure is really (or even marginally) due to WCB premiums and a future carbon levy. The driving factor seems to be free-falling commodity prices in a low-margin industry.

For the sake of argument, though, let’s momentarily accept that WCB premiums and the carbon levy are the proverbial straw that broke the camel’s back, making this operation unprofitable. What does this say about Western Feedlots (or, if you accept the canary-in-the-coal-mine argument being advanced online, the entire agricultural industry)?

In short, it says that these businesses are only viable when they can externalize the cost of production onto others. These externalities are borne by employees in the form of uncompensated injuries and poor working conditions, and by society (and the planet) in the form of unsustainable carbon emissions.

I don’t accept the camel and canary arguments, but, if we do, then we should ask if it is in the public interest to have such businesses continue. In a truly free market (which truthfully account for the true cost of production), shouldn’t they go out of business as unprofitable?

I don’t say that to be nasty (I feel quite badly for the 80 workers who will be out of work). But a business that is only viable if it can harm others isn’t one that’s existence is in the public interest.

And, before we accept the “and so it begins!” catastrophizing being bandied about by opponents of Bill 6 (and other government initiatives), it is worthwhile thinking through what is actually happening and ask ourselves if the rhetoric around this closure is accurate.

-- Bob Barnetson

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