Jul 17

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The price of profiteering

You’ve probably heard about the drought in Alberta. It’s a legitimate concern for many people as crop production is way down over last year. For some, this has been seen as an opportunity for profit, big profit. Unfortunately, this short term profiteering could have long term consequences.

First off, let me say that you need to make money to stay in business. I’ve got no issues with people making a profit. I’m in business, I understand the need to make money as well as anyone does. I don’t begrudge people who charge a fair price. My issue is with the short sighted approach to making the most profits you can at your client’s expense.

To me, business is a partnership. When I buy real estate, I pay the banks interest, my accountant’s fee, my lawyer, I reserve funds to maintain the property and I charge my tenants a fair price, all while treating them with respect. Personally, I don’t try to nickel and dime people, I don’t grind people to maximize my profits. I work with them so that we can all benefit. I, personally, think that this is a good long term strategy. If my bank is happy, they lend me more money. If my accountant is happy, my books get done right. If my tenants are happy, they stay longer and complain less.

Now, let’s look at the current hay crisis in Alberta. Crop yields are down, about 50% seems to be the average in talking to local producers (of course that is an average, some farmers haven’t seen a decrease, others have had almost no yield at all), but prices are hitting almost a 500% increase, with most listings starting at over a 200% increase. Math says, if production is down 50%, doubling (100% increase) the price is fair, so why are prices pushing 500% with talks of more? Supply and demand.

Hay is a commodity, it doesn’t keep long (for horses, most hay only keeps about a year, for cattle, you can get away with two, maybe three year old hay), so each year there is demand based on the number of animals out there. If cattle production is down, there is less demand.

With the BSE scare a few years ago, the cattle industry took a big hit. Low demand, low prices, no incentive to produce cows. Cattle, unlike chicken and pork, takes longer to increase supply. The average cow only produces 1-2 calves per year. A chicken could produce upwards of 180 eggs per year, and pigs have large litters as well.

Just as the cattle industry was beginning to grow, the drought hits and feed prices go through the roof. Less profits for the rancher. Their solution is to sell their herds. If everyone has the same idea, beef prices, to the farmer at least, will fall. I somehow doubt, after seeing old prices fall, that we can expect a price drop at the store. Food plants have a lot of storage capacity and will probably bank the profits which come from low costs of acquisition.

Of course next year will be a lot different. There will be a lot less cows, so a lot less demand for hay. Prices paid for beef will probably stay the same, but supply will be limited. Price of steaks will probably climb. It will be years before the number of cattle recover, if farmers are even willing to try after struggling from BSE and now drought. Many of the ranchers I know are getting out for good this time.

There may, of course, be government assistance for ranchers and hay farmers, so they may get out of this year financially stable.

The horse industry is different of course. We aren’t considered agriculture, so we don’t have government assistance. We care for animals, we don’t produce them, but that doesn’t mean we don’t have to buy feed for them. Stables can’t raise their rates to cover the 500% increase in fees, so many stables may face financial ruin this year if the rains don’t come and prices fall.

Many owners may face the prospect of selling their animals, but with the high costs that may not be an option as there will be few buyers other than the render plants. The industry could be devastated.

This of course doesn’t even begin to touch all the other industries which support the cattle and horse industries. Farm equipment sales will decrease, vets will have less work, tack stores, farm help, food producers…the list goes on and on.

So, who will the hay farmers sell to next year? Their consuming partners have all been wiped out by short term greed. Hay doesn’t have a lot of other uses than animal feed.

Lesson: If you want to remain in business long term, you can’t look at maximizing your profits, you need to balance it with keeping your clients. It’s probably better to think of business as a partnership than looking to maximize your profits.

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