Agriculture - An Industry Perspective

Agriculture offers a complex management challenge, it is the harnessing and enhancement of natural systems; natural systems and all their complexity. Business and the bucolic ideals of rural life find both harmony and conflict in the modern agricultural complex, where agro enterprise is gradually usurping the family farm. One laments the de-ruralisation of Canadian society, as with it goes more than just the bucolic ideals of farm life, with it goes the agrarian culture that made Canada a place of compassion, independence and community.

Agriculture now, more than ever, has as its stock and trade commodities. Commodities have a market characteristic of having a trading price that hovers at or near the average cost of production, in this environment success and failure occurs at the margins. Efficiency is found in an agro enterprise that is at the optimum scale, to ensure full asset utilization, to ensure sufficient mass to access the technologies that come into play in the modern agro space and to have sufficient product volume to access the full array of financial management tools, so one can step away from being the speculator and focus on production.

There is opportunity now to occupy more and more of the supply chain given the panoply of technologies available, the business of agriculture no longer has to stop at the farm gate. As is exemplified by most of the livestock industry, as margins become compressed as the industry matured participation extend along the supply chain.  To be effective in extending participation along the full supply chain, from the field to the consumer, sufficient scale to have a presence in the market for the end product is required. For those who venture in to this space successfully they are supported by every trend in the modern food consumption matrix. People today want to know where their food is coming from and whats in it - the key here is to have the consumer pay a little extra as opposed to a lot and as the producer enjoy the profit garnered from every stage in the supply chain.   

It is critical to examine the land base as more than a farm or ranch, it is critical explore it opportunity across industries. Companion enterprise opportunities abound, and they add more than just revenue, they add human resource actuation that is synergistic and beyond what agriculture alone can offer. By way of example - a cabin on one acre of land can net $3000 dollars annually, that exceeds cropping opportunities by a considerable margin. The Poundmaker ethanol plant has been very successful in exploiting the synergies that arise from the proximal location of an ethanol plant to a large feedlot. Ethanol plants as stand alone entities are very marginal, feedlots as a stand alone entity are marginal - as companion enterprises they can become profitable.

See link below for land purchase assessment and market opportunities 

http://nthomson2.blogspot.ca/2014/03/the-right-time-of-rural-land-in-bcs.html

The dominate trend in agriculture is the burgeoning emerging economies and the capacity for them to generate a expanded middle class - people are going to eat more and better foods. The question then becomes, how can a specific operation access the benefits inherent in that trend. The challenge here is sufficient product mass to address export opportunity, much of the government's thrust in the integration of the supply chain has been for the domestic market - policy has been developed with the market garden mentality. The key here is to generate enough product mass to generate interest in any given market channel - the key here is scale scale scale. One needs to contemplate the product spectrum, assess a given landbase's capacity to produce a given product, determine the product mass required to effectively access a market and build the business model to suite. For this to occur one needs to free thinking from an existing landbase's dimensions and operating conventions.

  

In general today, the scientific expertise - agronomists, veterinarians, animal scientists etc.- are detached from the production process, it is rare for an operation to be of sufficient size to hold this talent in house. Much of the operational intelligence at play in agriculture comes from government extension programs. The the challenge that arises is acre by acre site specific data that informs the management process. How many operations have accurate enough yield versus input data to calculate accurately the marginal benefit of excelled use of one input or another. The calculations are simple enough, the challenge is getting the source data specific to a given operation. There is detailed work to be done to determine yield volumes vis a vis a given variable - variety, fertilizer application, water application etc.- yet farm specific data is lacking. By way of example, fertilizer recommendations are often regional, when there are variances in requirement at the field level. When operating in an environment affected by the realities of  commodities for an extended period of time - generations in some cases - investment in truly understanding your immediate circumstances can pay massive dividends, as small returns are compounded over a long operating horizon.

Applied technology today offers much opportunity, there is a massive amount of latent marginal benefit to be garnered by the application of technology - in today's environment its hard to know what is there functioning and its potential, and its even more difficult to be innovative in applying emerging and desperate technologies to optimize a given operation. You know as you read this that opportunities are passing you by, you are just unable to process the mass of information to find them - it is the corundum of the known unknowns. 

The future of agriculture is bright, people have to eat, there are going to be more and wealthier people - the key is to look at the horizon, pick the trends that suite your circumstance and build the business model to suite - of course I would love to help. 

    

Business – Agriculture is a land play

There is a propensity in the world of high tech and escalating knowledge sector to overlook some of Canada’s mainstay industries; I am eager to draw your attention to agriculture. By way of example, the Cattle industry while experiencing a positive place in the cycle now, has traditionally been a “marginal” business. The cattle is trade heavily commoditized & well supplied, and as such, the prices garnered for cattle at sales hover around the industry wide average cost of production; so the reality is that cattle essentially take care of themselves financially – the people and assets to care for them but not the land base.

The Land associated with Cattle ranching then needs to stand on its own as a holding, and it does – over the course of the past decade it has exceeded inflation by good margins pretty consistently. The demand for agricultural land and the land’s resulting value is in no way related to the ability of the land to produce income through agriculture; if it were, agricultural land for ranching would be worth nothing, given the industries track record. The value for agricultural land comes from the western cultural imperative to own land and / or the speculative value of the land as a real-estate development and / or as a pure holding.

So why have cattle, well because, all the land will do is raise cattle in most cases and cattle provide a means by which to “maintain” ownership, in that, the process of ranching sees to the land asset’s care and wellbeing. So, while cattle-ranching is a more or less breakeven endeavor, with a grand spiritual surplus, it has value. The good news comes in the other opportunities that land base provides for companion enterprise, the cattle and land provide an essentially “free” place for other related businesses to function. Never underestimate the stability and opportunity that comes with accessing one of Canada’s mainstay industries, agriculture was here to get Canada started and it will be with us for a long long time.

Please see link below for past agro enterprise concepts and proposals

https://sites.google.com/site/midfraseragro/

BC Milk Supply Management System (SMS)

BC Milk Supply Management System (SMS)

Full Disclosure

If you believe in free markets, as I do, the presence of market control mechanisms administered by government is offensive. As an entrepreneur interested in utilizing milk production to bring value to a given land base, my encounter with the system was disappointing, to say the least – they simply refused to grant “permission” for me to do business; even when it was clearly demonstrable that no impact would accrue to incumbent producers and processors. So, in the interest of full disclosure, the comments to follow will be offered with inherent bias and a good measure of disgruntlement fueling the discourse.
  

What I wanted to do.

I've spent a considerable amount of time contemplating how to bring maximum value to a given land-based, that is to say perhaps more accurately, how to make farming/ranching pay. The key observation of the industry is that, from crops to livestock, it is a commodity environment, for the most part. This reality requires one to seek improved operating efficiencies relative to the norm or to occupy more of the supply chain so as to access the greater margins that accrue to business action closer to the consumer.

In acknowledgement of this key observation and others, I designed a business model that would, in my judgment, best address the contemporary realities that flow from capital costs, production realities and the “new food market”. I made market observations; that the functional food market was growing and that functional beverages with an appropriate macro-nutrient mix targeted to specific human action was ineffectively represented in the market. I combined these observations in the design of a the business model with efficiencies that emanate from an integrated supply chain to create the concept of Mid Fraser Agro -  a business concept – that included a 3000 head dairy, an UHT processing and packaging plant, and a nationwide marketing initiative for functional beverages with the base ingredient of milk.

I prepared a business concept document and initiated due diligence processes which began with a regulatory review, that’s when I encountered and came to comprehend the nature of SMS(s) and their effect on the industry and accessing the industry.     

Relevance of the Present SMS System

One understands the impetus for the creation of the SMS; the desire to effect price stability in a production space that has as components highly perishable product and a nearly emotional societal attachment to the product as a right to have for children. My father was a dairy farmer in the Fraser  Valley in the 60s and was active in garnering the SMS for himself and other dairy farmers.  The fact is that the Dairy farmers do garner a higher price for their milk than they would absent the system, in the present operating environment affected by the SMS. It is my sense that the latent capital that as a product of licensing costs that are as much as 1/3 of net worth, administrative costs, the inefficiencies that now exist due to regulatory restraint in pursuit of an optimal operation regime, regulatory errors which result distortions that increased transportation costs and a number of other realities, all conspire to effect a less profitable circumstance than if the market was left to function on its own. Add to this the challenges that SMSs have on implementing trade deals, in recent talks with Europe, SMS’s have weighed heavily on the process. One needs also to consider the advances in technology with respect to refrigeration, production methods, processing methods, and information systems and their ability to distribute information, in the context of the milk industry. Clearly, the ability for farmers to market their product is better now; the SMS has been overtaken by events in many ways rendering it defunct or at least of increasingly dubious value.

Complex Bureaucracy 

The most striking thing that becomes to light when examining the SMS universe is the weight of the administration on the industry. The supply management complex represents a tremendous transaction cost to the industry itself; additionally these sorts of cost tend to amplify as their effect works its way through the system; by way of example, the milk producers pay for people to administer the system and so when the product gets to market, mark up is added to these costs. 

The Softdrink industry has no SMS overhead, it is bigger, more dynamic; people just do business and the market takes care of itself. The BC  Milk Marketing Board (BCMMB), that exists by government statute, employs a large number of people, manages directly the transportation of milk, determines the nature and scope of milk products processed and sold in the province, determines the nature and configuration of production and processing facilities, controls access to the industry – this is a massive undertaking. The people working at BCMMB are excellent people who seek to fulfil their mandate, the challenge is their mandate or perhaps their presence in their capacity, it is inherently obstructive. In the pursuit of accessing a better price for milk for producers, the cost of doing so harms the efficiency of the supply chain, curtails innovation, effects stagnation in market share and impairs needed consolidation in the industry.

Over and above the BCMMB there exists another organisation called the Farm Industry Review Board (FIRB). The FIRB’s function is to provide a quasi-judicial body to manage disputes that arise between marketing boards, processors, producers and the public at large.  Another excellent group of people, well-educated bright people, employed to interface on behalf of the government with organisations created by the government who manage a market that can manage itself. It is difficult to measure the FIRB’s affect on milk prices for example, as the administrative costs are paid by the provincial government; there are costs, however.

The financial costs of administering SMS here are one consideration. The costs of the opportunities forgone in deploying people to a task that is superfluous are another. In my interface with these organisations I encountered people of significant capacity who’s talents, if directed toward promoting and developing market and product, would be effecting growth and dynamism rather than industry decadence.

Industry Situation Analysis

The Canadian Dairy Industry is well established. The SMS, given its monopoly, has facilitated an established product environment and processing industry. The incumbent operators have enjoyed constraint on competition, producers on new entrants to the industry and processors on the obstruction of new entrants in some circumstances. As they were able to do to me by participating in the FIRB appeal process (see transportation).

Consolidation / Scale

There is presently a culmination of events which are forging the industry in a manner that makes consolidation an inevitable trend, responding to that trend it is an imperative to be maximally efficient and hence profitable. Scale is an entrenched trend supported by fundamentals rationalized to the contemporary operating environment. Demographics of the participating human resource in the agricultural industry are driving consolidation – more people are leaving than entering. The capital requirements to participate are driving a different type of industry participant and require greater asset utilisation to support these increased capital requirements.

Consolidation is occurring industry wide, internationally as well as domestically, and consolidation is occurring at a more rapid rate in countries where dairy operations are exposed to the rigours of an open market system. Consolidation has been a trend found in every facet of the agricultural industry as the family farm makes the transition to a family agricultural enterprise or just an agricultural enterprise. In the USA where access to milk industry is unfettered by government intervention, average heard sizes are higher, approximately 900 head compared to 200 head in Canada.

  

“Large dairy farms have substantial cost advantages over smaller farms, derived from the ability to take advantage of economies of scale. On average, farms with at least 1,000 cows realize costs, per hundredweight of milk produced, that is 15 percent lower than farms in the next largest size class (500–999 head) and 35 percent lower than farms with 100–199 head. Other evidence suggests that costs may continue to decline as herds increase to and above 3,000 head. “ USDA Report

There is a mass of literature supporting larger scale, however, the supply management program limits access to the industry and limits scale. For example, in British Columbia, the herd size is limited to approximately 3000 head. It is nearly impossible to acquire the quota to get to that level, worse is the reality that the BCMMB is beginning to limit the ability to buy farms and consolidate the cattle and quota to a large operation. There is an insistence on the part of the BCMMB that upon the sale of quota that it be committed to the BCMMB quota exchange for purchase; this precludes the ability to consolidate the heard to optimum scaled operations.   

Other Comments Regarding Consolidation – The Free Exchange of Assets

Inherent in consolidation is the reconfiguration of the assets contributing to the milk supply. If left unfettered, assets will configure themselves to best satisfy a given operating environment. Herd mobility is a critical element to permitting consolidation to occur in a manner most advantageous to both the people entering the industry and those seeking to exit the industry – cattle and quota (as the quota system now exists) will gain the most value when being purchased with the intent of being directed toward the most profitable use.

This reality stands juxtaposed to another present reality, where the sum-value of all assets is greater than the sum-value of the segregated asset components in many dairy operations. The gestalt that is formed by the operations component parts, quota, cattle, equipment, land … etc presently holds an elevated value as a turnkey operation – as many of the assets associated with a dairy are as much a drag on value, as a contributor to value, in the absence of an ongoing dairy operation. The functional unit provides cash flow valuation that adds to the primary assets value – so as a unit the farm is more valuable at sale. One may also attribute a liquidity premium, driven by an accessible smaller asset base supported by a business with cash flow. Industry incumbents need to be able to maintain this premium situation to maximise their asset value at the time of sale.

A paradoxical situation exists with the free exchange of cattle and quota, whereby, allowing the small farming units to exist in a manner which provides for them to be marketed as a whole enterprises, gives rise to a circumstance that permits the extraction of the most benefit for industry incumbents wanting to exit, and yet provides a mechanism for consolidation. Policies which impair the free purchase of cows and quota and their subsequent free movement, would have the effect of both damaging industry incumbent asset value and retarding the consolidation that is happening in response to new operational realities.

The writer’s interactions to date have found no opposition to consolidation being allowed to occur. The limiting of the sale of quota or its transfer in anyway, however, seems to have a chilling effect on the trading of dairy related assets – both CDQ directly and related farm assets. One may expect to see, if CDQ transfer is curtailed or limited to the present exchange indefinitely, decadence effected on the industry – where consolidation or regional adjustment is curtailed or operational transformation is retarded.

The SMS prevents the free flow of assets and the adjustments that would occur in its absence if assets were permitted to trade freely.  The discussion above offers recognition of the overall distortion due to the mere presence of the system and brings resolution to the “sub” distortions that occur as various policies are actuated. This is demonstrated repeatedly as one examines the SMS, below you will be exposed to policy related to the sale of quota (CDQ) that retards its accent in value, there are just endless examples of things occurring under the SMS that would never occur absent the system; distortions abound.

Continuous Daily Quota Review

BCMMB Consolidated Order

Calculation of the Market Clearing Price

10.          1)The market clearing price for the first Quota Exchange after July 31, 2010 shall be the average of the market clearing prices for the preceding 22 exchanges, namely, $38,000.00 per kilogram.

(2) If, for three consecutive Quota Exchanges:

(a) The volume of Continuous Daily Quota subject to offers to buy has

Exceeded the volume of Continuous Daily Quota subject to offers to

Sell; and

(b) The offers to buy have been filled to 50% or less; the market clearing price shall be increased by $500.00 per kilogram for the next exchange.

This mechanism is disconnected from the functioning dairy industry and natural market influences on the value of CDQ. The three month wait to increase price and an immediate response to reduce price may represent a mechanism prone to reduce CDQ value. CDQ finds its value as a product of the returns it can generate in the context of a given market circumstance, there exists the maximum possible price for CDQ, which is a function of its carrying costs relative to other operational factors, other capital cost, input costs and revenue. There is then likely to be a degree of cyclicality associated with CDQ prices absent interventions, cyclicality mostly influenced by input values. The more rapidly CDQ can be transferred from one dairy producer to another, the more accurately the price equilibrium (value) arrived at will represent the realities of a given operating environment. The manner in which the CDQ exchange functions now may be less optimum than if a transparent bid ask process facilitated immediate transfer. A transparent bid ask exchange would generate more price volatility, but at any given point in time, the value would be a fair representation of the market value of CDQ derived from industry operational realities. It is apparent that the CDQ Exchange as it functions under these regulations may retard the price of CDQ over time, and prevent quota from reaching equilibrium in a manner that is representative of present market conditions – market conditions of input costs and capital carrying cost related to dairy production.

  

The calculations above offer approximations, I am sure the BCMMB has better data; they do however, serve to support and demonstrate an appreciation trend in the ownership of CDQ. When CDQ ownership is presently considered, one can view it as an appreciating paper asset, with an appreciation rate of approximately 4% per annum above an assumed average 3% generalised inflation rate. The “real” appreciation is beneficial to operators as it represents a reduction in the cost of ownership than would otherwise occur in a stagnate or descending CDQ Value circumstance. Policies that retard CDQ valuation effect a substantive reduction in income to incumbent producers. The freer the transfer of CDQ, the more likely that CDQ value will ascend along with other asset values like land.

The Consolidated Order is the document that governs the BCMMB Conduct.

10 - (3) If the volume of Continuous Daily Quota subject to offers to sell exceeds the Volume of Continuous Daily Quota subject to offers to buy, the market clearing price shall be reduced by $500.00 per kilogram for the next Quota Exchange.

9 - (2) If the volume of Continuous Daily Quota subject to offers to sell exceeds the volume of Continuous Daily Quota subject to offers to buy, the Quota Exchange will be cancelled and re-run within two weeks using a market clearing price that has been adjusted in accordance with these Rules.

The combination of Section 10 – (3) and 9 – (2) offers an impediment to quota reaching a price equilibrium that reflects its value in the context of operator’s ability to generate revenue by owning quota at any point in time. Circumstances may be such that people are willing to pay more, and a transparent bid ask process would provide an immediate response in CDQ price to operating conditions – when input and carrying cost are high CDQ price will fall, when input cost and carrying cost are low CDQ price will rise – this is a healthy circumstance for several reasons, perhaps the most important of which, is it gives operators the ability choose to exit the industry at the point of maximum benefit to them – when CDQ prices are favourable.

11 - (2) Subject to section 12, if there is insufficient Continuous Daily Quota subject to offers to sell in any monthly Quota Exchange to meet all offers to buy Continuous Daily Quota on that Quota Exchange, then the available Continuous Daily Quota will be Transferred to each buyer on a percentage basis - i.e. if there is enough Continuous Daily Quota offered for sale to fill 95% of the offers to buy, then each offer to buy will be 95% filled.

6 - (2) Subject to subsection (3), the maximum amount of Continuous Daily Quota which may be contained in an offer to buy is the greater of 13.7 kilograms or 10% of the Producer’s current allotment of Continuous Daily Quota, up to a maximum of 109.6 kilograms.

From the perspective of Inverine Developments and the creation of West Fraser Agro, where an objective assessment of the industry drives operational scale of up to 3000 head, the application of these sections impede the ability to gain scale through the purchase of CDQ at a rate that permits viability. Please consider, that assuming an entrant could purchase CDQ at the full rate these clauses dictate, it would take four years to garner sufficient CDQ to operate at capacity – if my assumptions are correct – please see CDQ Analysis matrix below.

The following matrix is an approximation of the operating outcomes in a circumstance where MFA was able to garner full quota purchases as per the CDQ Exchange rules, as the writer’s present state of awareness perceives them to function. It is the belief of MFA’s developers that maximum efficiencies are achieved at or around the 2500 to 3000 head mark. In the pursuit of this scale, it is required to invest in the infrastructure to support this herd size at the outset and carry the cost of ownership of those assets through the period of acquiring cattle and quota. Full quota, even under ideal circumstances, is only reached at the close of four years, operational break even takes a full 23 months achieve and overall return on invested capital is only .8% over the cattle and CDQ acquisition period of four years. Compare this to a fully operational year where the return on invested capital exceeds 10%.

Some modification to the CDQ Exchange rules is required to provide for entrants to manage this dynamic associated with purchasing quota for a stand-alone dairy operation. The functioning of the Exchange as the rules now provide for; impairs, entry, the natural trend toward consolidation and the pursuit of scale efficacies. There are several means to address this issue, simply increasing the maximum CDQ purchase amount in conjunction with the section 12 – (1) provision for new entrants would offer a considerable improvement. Optimally, however, the transfer of CDQ would be facilitated through an open and transparent exchange in a typical bid ask functionality; allowing CDQ value to respond to demand for the privilege to produce milk, as influenced by the market dynamics external to the Supply Management System. By allowing people to enter the dairy industry purely on the basis of their ability to satisfy licencing requirements and apply their capital to the challenge, the general health of the industry, at least its vibrancy, would be enhanced.

CDQ Entry Analysis

 

The present configuration of the CDQ Exchange in conjunction with the suspension of the direct sale of CDQ between farms, absent any other means of transferring quota, may offer risk of the value of CDQ – relative to BCMMB precedential operation – experiencing less favourable appreciation in the future absent other means of transferring quota that allows for “natural market dynamics” to determine the price of CDQ, some of which were at play in the BCMMB’s previous actions. The writer is not aware of the events that precipitated the reported suspension of non-exchange transfers and trusts they were perceived as necessary by the BCMMB administrating body. The above observations are offered from a lay person’s perspective and the perspective an entrant wishing to gain scale and viability as quickly as possible.

NOTE: The writer, at the time of writing, has only received verbal notice of a suspension in non-exchange transfers and as yet has been unable to verify through documentation this is in fact the case.

Market

At present, under the SMS and related marketing efforts, the milk market is effectively stagnating. There are areas of improvement, however, the decline in per capita consumption of fluid milk offsets these advancements.

One is unable to attribute this stagnation entirely to the SMS system; there are counter convention consumer groups in place that have boycotted the consumption of milk products; their effect is substantive, however, it is the righters sense that the SMS is mostly the cause.

Innovation

One of the key determining factors in advancing the use of a product with market penetration to the degree milk has, most households have a milk product of one kind or another, is innovation in production, processing and product design. The government recognized this to be the case and in 2006 mandated SMS sectors to put in place “innovation” programs. In the none SMS sectors, think cars with similar market penetration, innovations are what the industry lives on, in any given year there are literally hundreds – that's innovation. Since the government mandated innovation in about 2005, at the time of the writer's review of the system in 2010, there had been one “innovation” organic milk. Organic milk is really the same as none organic milk, the production process is on altered slightly. 

Once the milk finds its way into the hands of the processors, who under the umbrella of the SMS are required to compete, innovation is quite brisk. One encounters in the market place variations on a theme, yoghurt, for example, has a thousand incarnations.

The other challenge with the SMS is that programs directed toward product innovation are intended for, mostly, incumbent processors. A cumbersome aspect of SMS is that every product has to be defined in the context of regulatory requirements and permission given to sell it. Absent SMS, no one is worried about how a product is defined, save how it works in the market place. This reality places a whole other level of managerial concern on product development and in many cases, as it did in mine, stifles it all together.

Innovation needs to be considered with a broader scope than just product innovation - production and processing innovation needs to occur. The present modality of regulation by the BCMMB precludes many types of innovation from transpiring. The writer’s proposed business model would have accessed the full spectrum of innovation, innovations in scale, innovation in the degree of integration and innovation is product offering. The amalgam of these innovations would have generated a powerful means by which to address the market, with an anticipated expansion in overall milk product consumption. These sorts of obstructions to innovation of all sorts are likely to be putting downward pressure on customer consumption of milk as they are failing to access both more efficient production modalities and product innovation; so the consumer who is offered constant expansion of choice and price improvement from competing products, finds no reason to pursue milk products. Products competing with milk, or milk bases products, are subject to none of this type of obstruction and over time milk product market share will decline and opportunities for dairy farmers will decline with it.    

Stagnation

The reality is, in the case of milk, there is stagnation in the production sphere, the product sphere and overall market share is waning. One has to ask why is this the case, the types and varieties of other competing products, soymilk, ricemilk, sports drinks, juice beverages – the list is endless – are expanding and taking market share from milk.

It is the intent of SMS to reduce participation in the market to effect and increase in the price of products sold, that is the fundamental reason for it. What comes in tandem with this reality is the reduction in disruption - the creative destruction processes that fuel innovation, the ability for incumbents to impair others from access to production reduces access to the industry, distortions evolve in the producing and transportation of products. The rigours of an unfettered market discipline the industry so that it is rationalized to demand realities in the context of the market as a whole. The entrenchments that come with SMSs effect upward pressure on price. Please review the graphs below and note the price of Canadian Butter and Canada Skim Milk Power relative to world prices; decide for yourself the accumulated affect of the SMS.       

Transportation

The issue of Transportation as it relates to the BCMMB demonstrates the distortions that come into play in the administration of an SMS. I believe, in the interests of “fairness” the BCMMB has as a policy that the cost of transport for milk should be “equal” for all producers regardless of where they are located. The BCMMB actually, in a direct manner, manages the transport of milk from producer to the processor. Over the years of operation, as a result of this policy, there has been a disconnection between the location of producers relative to processors. If either processors or producers were responsible for transportation costs, the concern would be given to their relative location.

One of the key efficacies garnered in the at scale integration of producing and processing is the elimination of transportation costs in that section of the supply chain. At appeal under the FIRB, processors sited my absence of transportation cost as “unfair” and it appeared the tribunal gave weight to the assertion. So then it can be said, that the BCMMB impaired production innovation AND permitted the impairment of the implementation of a business plan that sought an elevated level of efficiency relative to the industry at large.

This is just one of many distortions that evolve when industries are shielded from, or regulated in a manner that prevents, disruptive influence or action rationalized to profit.     

Cost to the Consumer

The cost of milk products to the consumer are higher as result of the SMS; this reality extends beyond just fluid milk and milk products in general, milk products are a base ingredient in many products: all these products are affected by the price increase. In fairness to the administrators of the Milk SMS, provision to use cheaper skim milk from the world market for production of products intended for export is permitted.

Transition to an unregulated market

The government has put a system in place which dairy farmers have come to rely on, the government has a responsibility to ensure the interests of farmers upon dismantling the system. In many jurisdictions, governments have simply ended the system and farmers have been left marginalized and years of accumulation lost; a circumstance we must seek to ensure never takes place in Canada.

New Zealand facilitated the transition away from SMSs to an open market by facilitating what amounts to a farmers CO-OP. Literature indicates this was a relatively successful approach.  

The Government recognizes the value of Quota, it is measured in the billions, an approximation of $15 Billion would be a ball park number nationwide. The government will need to see the return of farmers money in some way, perhaps by a combination of cash payments and extended tax considerations for incumbent producers.

There are a number of potential strategies for the disassembly of SMSs from - declining monopoly to just a cash payment, the key is to ensure that government sees to the preservation and enhancement of the industry in the process of dismantling the SMS. As stated, farmers need to be wary, as other governments have been ruthless in their exists from SMSs.  

Brazil – New Agro Industry Opportunity – Changing Economic Scene

 Perhaps it is time to reconsider the Brazilian farming opportunity.

There are some cracks forming in the BRICK economies. While business cycles are a common occurrence and one should avoid viewing this as an impending doom, it can be viewed as an indicator of a potential entry point in to the Brazilian Agro scene. At some point undulations in the economy at large will effect change in pricing of agricultural land. One needs to remain vigilant, so as to optimise entry into the agricultural land market.   

  Excerpts from 2006 business concept.

          Discussion Scope:           

In 1993, Brazil came to the view of the writer via an article in a magazine. The article chronicled an agricultural land arbitrage at work in the world market place. The North America farming and agro business communities had become widely aware of the presence of Brazil as a place of relative advantage for agriculture. The article spoke of Canadian and US farmers buying large tracts of land in Brazil. Events have transpired since 1993 that cast a very positive light on Brazil. One might regret missing entry at a more nascent state, however, the present circumstance, now more mature, provides a stable and tested environment. There is now a substantial breadth of experience to draw on when choosing to access the Brazilian agro business stratum that replaces adventurous risk with greater certainty.    

The writer’s present thought modality has formed in the context of the present Brazilian circumstance, as agricultural production emanates from a 300,000 acre block of Cerrado land. While this provides expansive subject matter, the land base is virtually limitless as it would relate to an agro enterprise. The vast, virtually limitless quantity of contiguous land provides an expansive pallet from which to scale at will.

To bring this expansive pallet into full view consider this quote; “It took some 10,000 years to expand food production to the current level of about 5 billion tons per year. By 2050, we will likely need to nearly double current crop production again.”  Norman E. Borlaug Nobel Prize winner. The United Nations is reporting the likelihood of food shortages over the next 10 years. Other literature exposes the reality of industrial competition with agriculture for water in China, advocating China will choose to spend it’s “1,000 tons of water required to produce 1 ton of grain” on the more lucrative industrial use and import food products. “When wheat prices within China started climbing in the fall of 2003, the government dispatched wheat-buying delegations to Australia, Canada, and the United States. They purchased 8 million tons, and overnight China became the world’s largest wheat importer.” Wheat is only one commodity and China is only one country. This bodes well for agro enterprise in the coming decade and beyond. As these and other factors all merge, agricultural production in a comparatively competitive setting like Brazil is an exceptional opportunity for the well supported creation of an agro enterprise. While one recognizes the cyclicality of agricultural commodities, contemporary world events have certainly lent support to the aggressive pursuit of the opportunities agro enterprise is going to offer.

As all events the world over conspire to bring food production to the fore and as Brazil offers nearly limitless acreage in a competitive environment to unitize land and as every acre offers profitability; what limits scope?   

               

Brazilian Farming Opportunity.

Brazil contrasts positively with all areas of the world for agribusiness opportunities: still abundant supplies of well valued agricultural land trading at prices related to productive capacity as opposed to other values. Government policy has been conducive to development of the agricultural potential the vast landscape offers. There has been an emergence of a substantive and booming agricultural industry that seems to have captured all levels of government’s support, based largely on the industry’s sheer magnitude as a contributor to GDP. The positive business climate is further substantiated by an impressive array of new entrants over the past decade, Nestle, John Deer … the list is extensive, and these are all organizations that understand the world agriculture market and have deep insight into the long term political picture, which bodes well for the Brazilian operating climate. The government, recognizing a deficiency of capital in Brazil to develop the vast tracts of arable land, has permitted substantive foreign investment, as well as direct foreign development. There have been many “hands on” farmers from every corner of the globe start operations in Brazil and even the most brash and culturally miss-attuned have found success. While the nature of the Brazilian opportunity has certainly matured over the past decade (land values have increased substantially) the general environment has gained greater predictability and healthy returns on capital are in the offing. In the spirit of doing good while doing well, there are plenty of opportunities in the course of lucrative business, to accentuate the social surplus with conscientious action.

There are vast quantities of land available in expansive acreages, contiguous lands in the magnitude of 300,000 acres well situated by running water, and flat – every acre counts. These lands, known as the Cerrado, while in their native state are unproductive, respond well to remedial treatment, a proven set of practices are now employed with consistent success. The past decades of agricultural activity have provided a high degree in predictability in economic outcomes in farming developed Cerrado lands and opening new Cerrado lands.

Brazil’s primary asset, its excellent work force, offers relative advantage to other jurisdictions. There is availability of human resources to permit strong operational support in the form of labour cost advantage, even while extending remuneration in the context of world parity – or rather Canadian life style parity.    

In an atmosphere of just beyond nascence and with a proven track record, there exists a substantive opportunity for profitable farming in Brazil, unleveraged return on assets of 10% to 20% on production, and land assets are appreciating by substantial measure every year.

          General Operational Vision

Brazil, in the present world circumstance of open trade and with a domestic burgeoning middle class offers opportunity to pursue expansive agricultural operations. In a world commodity driven business, where cost advantage and scale are rewarded, Brazil gives the means to respond with vigour. Every facet of operations can be scaled to optimum performance due to the availability of land with values rationalized to production. Couple the market, the land’s nature and availability, plus the labour advantage, with all other inputs more or less equal in world terms, and grand scale means grand returns. Grand scale, in and of itself is exciting, comes in this circumstance with sound economic imperative. The first element of operational vision is the pursuit of grand scale.

Resting on a foundation of grand scale, the next element of operational vision is diversity. The “mixed farm” takes on special value in the Brazilian context, given the geo climatic reality and access to scale, the full farming spectrum can be pursued. The full breadth of livestock and cropping are available, and given the provisions of scale, they achieve a fungibility in a magnitude that permits access to fully exploited synergies and market response.

As with all mature industries in a commoditised environment, the aggressive pursuit of marginal gain is imperative, and agribusiness is no exception, even in a favourable environment. As is regularly the case, the pursuit of margin in mature commoditised industry leads to the occupation of as much of the supply gain as possible. To ensure the full benefit the Brazilian opportunity offers, the next element of the operational vision is to pursue, wherever and extensively as possible, a product’s full supply gain opportunity. From seed to market, penetrating any given channel as far as practically feasible.

Human capital is the key ingredient to operational success in any environment; the evolving Brazilian human resource atmosphere comes with special opportunity and the need for conscious effort to build goodwill with the indigenous participants. A key operational element will be to invest a substantial share of the labour arbitrage in the development and retention of Brazilian people willing to commit to the venture. The region comes with a recent and socially salient history of reduced human state and displacement in the wake of aggressive business strategies; naturally fostering some ill will. This operational element seeks to address good business sense, by the aggressive branding of the company as an entity that recognizes the business imperative of good human relations and, more importantly, has at it’s core the desire to extend companionate human consideration. This element promises immediate operational benefit, and benefit for broader acceptance by all facets of the Brazilian society.       

The large tracts of Cerrado lands in many cases come with challenges accessing markets. Presently, the region this document advocates accessing, has poorer infrastructure relative to competing regions in the rest of the world. Depending on the final selected location, this reality has varying degrees of affect.  An important operational element will be to pursue the highest value goods for transport possible. Integration and mixed farming practices will be deployed to meet this challenge. A tonne of whole powdered milk at a value of $2200 mt offers a better transportation return than a tonne of Soya Beans at a value of $290 mt.

The Brazilian Cerrado lands in their natural state support a broad range of flora and fauna. There are policies by local governments that require retention up to 25% of any given land base in it’s natural state. Far from a detriment, this provides opportunity for bringing tourism to the mix of enterprises. The subject property has some 138,000 acres of non–arable land, while suited to some degree for grazing this land is largely unproductive for agriculture. This land base, properly integrated with other lands to provide wildlife corridors and protected area will provide a perfect setting for people to observe the breadth of wildlife the Cerrado region has to offer. In the interest of deriving maximum benefit from the land base, this use of land is worthy of consideration as an operational element.    

While the primary focus of this document is to create a profitable agro enterprise, utilization of the land in a manner consistent with best practices relating to environmentally congruent stewardship warrants regard as an operational element. Fortuitously, many environmentally sound practices contribute to operational efficiency, by example, zero tillage practices both contribute to environmentally beneficial stewardship as well as profitability. Through operational rightsizing, companion enterprising, tailoring various enterprises resource harmonisations, the environment operational element can be satisfied. This is exemplified by the advent of closed loop ethanol plants that utilise animal waste, digestive processes for by-products to generate ethanol, methane generated electricity, and the production of agricultural products in a manner that reduces the overall negative effect of human activity; the synergistically combined effect is smaller than the sum effect of the separate operations. The Brazilian bioclimatic circumstance in conjunction with the acceptance of grass finished beef by the Brazilian market offers an environmental surplus relative to North America beef by the reduction of carbon intensive inputs. This same advantage extends to the pasture based dairy operation discussed below, cattle live full time on pasture with small amounts of non forage supplemental feed, the only energy input being used to irrigate the pasture. In this way livestock operations are contributing to environmentally sound agro practices by reducing carbon intensive cropping, and providing for fertilizer and pesticide reducing crop rotations.      

            Business Entrance to Brazil

The review of several accounts of startups of agro-enterprises in Brazil, exposed a cultural imperative to construct relations of substance with established organisations in the country. Agro-Plane will seek to ascertain via an ethnographic assessment what expectations are, beyond superficial or just top level interaction, but the deep routed ethno political requirements as determined by cultural imperatives and contemporary concerns. Then, with good information and local direction, Agro-Plane will immerse itself in the Brazilian business ecosystem as harmoniously as it is able.

All literature, and hence conduct, will be imbued with the clear purpose of the company’s desire to “do well while doing good”. In the context of a grand scale strategy, the aggressive effort to amplify the social surplus generated by the very act of doing business, will serve to secure the long term security of the business as well as satisfy the western ethic of fair exchange. It is the writer’s belief, that the active cultivation of social equity, ergo brand equity, has the promise to find residence in business equity in the form of goodwill. This principle applies in all realms of action, it gains prominence in environments where extended deprivation is gaining saliency through the full spectrum of society. A very small investment as a gesture of legitimate extension of recognition of an underserved population, serves to communicate good intent.

While pursuing all the avails of modern agriculture, including all recognized seed types, crop varieties and modern husbandry practices, Agro-Plane will seek to conduct itself in a manner that satisfies the perceived imperatives of progressive elements in Brazilian society. Popular literature offers some insight into to societal risks to operations such as the one Agro-Plane is proposing, large scale acquisition of land is finding conflict with elements of Brazilian society who see foreign development as an obstruction to their rightful access to the land. This element is presently subdued as the government is eager to have enthusiastic foreign involvement; however, people ultimately determine outcomes in any given endeavour. These elements require keen attention and to be embraced as a part of the operating environment, and then brought into the ambit of Agro-Plane’s fair minded conduct, if successfully executed, what appears as a liability may quickly become an asset.          

Agro-Planes entrance to Brazil will begin with study. Instituted as a cultural and integrally constituted facet to the company, will be a constant responsiveness to societal dynamics conducive to Agro-Plane’s ongoing acceptance within the country’s establishment.

           Operations Exemplified

Brazil offers one of the most competitive locations for a dairy operation. Initial investigation indicates that Brazil compares favourably to New Zealand in terms of production attributes. New Zealand has established itself as the most dominate player in world of export milk products, with very nearly the lowest production cost in the world it competes aggressively. Brazil, having now established ties with China and other countries is positioning itself well to challenge New Zealand’s present position.

In Brazil, Agro-Plane can take comfort in knowing exports are growing, but they hold only partial significance as the domestic market is burgeoning. The Brazilian dairy market grew by 8.7% in 2007 to reach a value of $19.2 billion. In 2012, the Brazilian dairy market is forecast to have a value of $26.8 billion, an increase of 39.5% since 2007. The Brazilian dairy market generated a compound annual growth rate of 8.1% since 2003 and is predicted to generate a compound annual growth rate of 6.1% from now through 2012. While the growth is trending down, growth is still substantive. The strength of the Brazilian domestic market provides strong support for the inclusion of an integrated dairy operation.

In satisfying the Grand Scale operational element, and to address scale that maximises efficiency, and in recognition of the abundant land resource with the resulting feed supply, the dairy milking operation can seek to scale to the maximum end of reported efficiency band. The best economies of scale, as indicated by the evolution of the United States dairy industry and recent scale analysis, are found at 2000 head and remain intact until 10,000 head. The writer’s present level of awareness of documentation related to dairy milking operations and the Brazilian circumstance provides a rational basis for pursuing the upper end of the efficiency band of 10,000 head. If dairy offers the most beneficial production regime and the rational suggests development of dairy operations beyond 10,000 head, observations of the industry suggest developing additional 10,000 head production pods as opposed to developing a single operation larger that 10,000 head.

To satisfy the “expanded presence in the supply chain” operational element, integrating the dairy milking operation with processing offers opportunity to extract greater margin from the milk product. The nature of processing and the extent to which Agro-Plane chooses to penetrate the milk supply channels will be determined by the situation of the farming enterprise in relation to population and the access or barriers to the final market. The larger tracts of land are located in more remote areas which often face product transportation challenges. In these cases a product with high value per tonne offers considerable advantages, and milk powder maybe the product of choice. If however, site location finds Agro-Plane closer to a substantive retail market that seems readily penetrable, a UHT / Tetra packaging process may offer greater opportunity.

To bring the breadth of opportunity for dairy in to the Brazilian context, milk sales had total revenues of $10.1 billion, equivalent to 52.8% of the market's overall value. A 10,000 head operation integrated with a UHT / Tetra packing plant producing 80 MLitres annually represents between .2 - .5% of the domestic market or 4-7% of the annual growth in the domestic market. In any circumstance the market’s ability to absorb Agro-Planes production is evident. The domestic market value alone and the production dynamics of an integrated dairy operation could easily provide sound rationale to add an other 10,000 head production pods, add to that the overall world market and export opportunity, dairy operations require thorough contemplation in Agro-Planes design process. 

This brief review of the dairy opportunity in the Brazilian context sheds light on the operational spirit the writer wants to bring to Agro-Plane’s organizational culture, the pursuit of the full opportunity, maximum rationalised scale and occupy as much of the supply chain as any given circumstance practically permits; in the context of responsible environmental and human concern.         

          People In Action

One of the most prominent advantages that Agro-Plane has in the context of a 300,000 acre operation is the ability to bring elevated expertise to a concentrated geophysical, bioclimatic, economic circumstance. Inherent in this enterprise format are resources capable of attracting maximally beneficial intellectual capital in the context of operational continuity. Traditionally, even in the large scale Brazilian context, agro enterprise environments have management in a largely “hand’s on” capacity, garnering management information and direction from professionals outside the working operation. The operational environment Agro-Plane creates, will generate resources plenty enough to offer remuneration that is sufficiently attractive to bring in house, through the critical development period and beyond, highly developed personnel who will maximise the application of science in concert with the best management judgment.

Agro-Plane as an enterprise accesses the most challenging of management demands, a commoditised market, complex biological systems, complexity in the geo political realm, cultural adjustment and others. This environment, although complex, offers great opportunity if properly managed and with that opportunity comes the resources to facilitate the collection of skilled and adventurous people to address the challenge. 

Ethnographer

Ethnographers will be deployed to frame the operational and market environment that Agro-Plane is intended to function in. Ethnographic study can examine the macro picture first to gain a thorough understanding of the various affecting narratives and artefacts, their context and methods to address them. Once prospective sites for Agro-Plane’s enterprise are identified a finer filter can be placed on ethnographic assessment. Assessment can then take place under a well informed set of criteria that provides insight to the best culturally dispositioned local, seeking an optimum atmosphere of pliant acceptance and support.     

Assessment Team

Raw land conversion efficiency is a key component to Agro-Plane’s success. Regardless of the ratio of land in production to land needing development at the start of operations, accessing large quantities of contiguous land will require converting land from its native state to a productive state. The net benefit under present practices, of purchasing a piece of developed land over non-developed, is approximately $825.00 over five years, that is to say, developed land will generate $825.00 more than undeveloped land over the first five years. Raw land conversation efficiency needs to be thoroughly explored.   

The land can support a multitude of different crop productions which it can send; direct produce to market, or through some process, or to livestock production. All production options need to be inventoried under the consideration of: return per acre, value or requirement to facilitate production, marketability, opportunity for companion enterprise, overall opportunity to facilitate synergies and all other matters of pertinence. Out of this process will flow operational opportunities that offer profitability in other settings but are unproven in the Brazilian operating environment, these can be listed as potential research projects, and benefit can be quantified as current awareness permits.           

The data collected to inform action in the Cerrado context will then be directed to the task of determining the optimum location for operations, land quality, location in the context of transportation, availability of inputs, geo physical, bio climatic specifics, geo political influences and risk, and other influencing factors will be quantified by effect on profitability.

The assessment process can then inform the design and creation of an enterprise specifically targeted to all the influencing factors, in this specific circumstance on a specific location in response to the most advantageous market. Please review below for an initial listing of people and events related to the creation of Agro-Plane.

            The Concept of Agro Plane’s Genesis

Agro-Plane finds its genesis in the advantages a given landscape provides in response to the world market. Contemplation of the breadth of an agro endeavour as it relates to the opportunity of millions of acres of Brazilian Cerrado land, provides the scope of thought from which to launch the design process. In the absence of size constraint, the organizational design process as it occurs in the Brazilian context is a much broader forum than any other comparable exercise in any other jurisdiction in the world. The ability to appropriately apply scale, by virtue of the land dynamic, offers the prospect of developing a powerful business model to aggressively and precisely address the contemporary market circumstance. Of significance is the ability to create an operation absent of the traditional siloed modes of action presently entrenched in agriculture in conjunction with the volume of land to bring it to a single management regime, provides the environment where land scale constraints of other environments are lifted. In this environment the design process can seek to fracture traditional enterprise boundaries, as defined by evolutionary forces constraining existing single entity land based agro enterprise, and meld as many agricultural pursuits as informed choice indicates offer maximal synergistic benefit.

This unique circumstance permits integration in type and scale unfound in the predominate practice of agriculture. Presently the opportunity is being pursued from the traditional perspective of crop growers as opposed to the perspective of food creators. A crop grower’s thinking stops at the farm gate; a food creator’s view extends along the complete food chain. The volume of land in a single block enables production volumes of scope and variability, which contributes to tailoring product supply to facilitate the pursuit of the full food supply chain; oft times, agricultural operations have inadequate product volume to address the market effectively.

To clarify, examine the evolution of agriculture to date. Land boundaries have been determined by a single entity utilizing the land in a point in time. In Europe land parcel size evolved constrained by medieval agricultural practices and they are very small. In North America 160 Acre parcels reflected the dominant operational regime of the time of land allotment. Over time consolidation of land ownership reflected the contemporary organisational body and it’s ability to respond to a given production capacity. Then, as agricultural processes evolved to greater capacity, capital requirements of acquiring land which were driven by dynamics exterior to agricultural enterprise, created barriers to optimal scaling. The present situation with Brazil’s Cerrado lands is free of these evolutionary constraints.

This non-traditional land magnitude allows the congregation of a plethora of agro enterprises to find existence in intimate proximity and by virtue of unorthodox intimacy new modes of interaction will present themselves. The design process needs to be cognisant of this special circumstance. Consider how many places in the world where a million proximal acres of land have the potential full under the management of a single entity: this is a rear occurrence and offers unparalleled potential for an eminently apportioned and profitable enterprise to be created. The key point of contemplation in the design process is the unique circumstance the Cerrado lands provide to deploy a panoply of agricultural knowledge and technology in a manner hitherto unexplored. The access to the base ingredient of food production, land, in a proximity and volume sufficient to supply superior productive capacity relative to the norm, gives rise to special enterprise design considerations, and access to what the writer believes is exponential comparative advantage.

The reality of optimal scaling absent other jurisdictions evolved operation constraints is apparent in contemporary Brazil. The state governments are in fact encouraging scaling and integration as part of their development platform. There are many examples of large scale farming operations that reflect the unique opportunity large scale agriculture offers. What is missing in many operations as described in related literature is adequate capital to address these opportunities optimally. In a capital rarefied environment, equipment is often smaller than competing jurisdictions would use and important investment in irrigation is omitted, thereby failing to optimally utilize the land’s potential. 

To bring into context the Brazilian opportunity for scale consider the primary implement of agriculture, the tractor. In the Canadian farming environment a $350,000 tractor is utilized weeks of the year due primarily to seasonality and remains idle the rest of the year. In Brazil one is able to manage the cropping cycles and garner large volumes of contiguous land sufficient to see that tractor working 24 hours a day 365 days of the year, or at least utilized to a far greater extent. In designing an enterprise, this opportunity for scaling in accordance with full asset unitization is able to be optimally addressed in the Brazilian Cerrado region.