AGRI Committee Report

Status Report:

Financial Analysis Relative to Meat Packing Companies in the Context of the BSE Crisis of 2003

— Phase I

Introduction

Consulting and Audit Canada(CAC) has been engaged on behalf of the Committee to provide assistance and expert financial advice in the review and analysis of financial information provided by specific companies. CAC was also requested to assist in formulating the information requests and templates, based on the Committee motion of March 29, 2004.

This report provides the status to date on the information submitted and our analysis thereof.

Background

The Committee has conducted hearings and other research. In April 2004, the Committee submitted its report titled “Canadian Livestock and Beef Pricing in the Aftermath of the BSE Crisis”.

According to this report:

• the exports of beef products were down 36% in the first 11 months of 2003 as compared to the previous year;
• in the post BSE period, Alberta feedlots suffered a 33% decline in price of steer from 2002 and a 40% decline in price from the pre BSE period in 2003;
• fluctuations in wholesale prices (i.e. prices received by packer) were more moderate than fluctuations in cattle prices and retail price fluctuations were more moderate still;
• the wholesale to farm-gate (i.e price received by cattleman) price spread increased from $70 cwt. in January 1999 to $100 cwt. in December 2003 and retail to wholesale spread increased from $220 cwt. to $320 cwt. during the same period. The pattern has been transpiring for more than four years;
• average retail price of beef and beef products declined 13.8% between May and December 2003;
• packers have faced added processing costs; and
• there was an increase in gross margin to $431 per head for the period September 2003 to February 2004 versus $144 per head a year earlier for Canadian packers, as quoted in a report from an industry association.

In July 2004, the Auditor General of Alberta released his report on the BSE crisis. Among his key observations are the following:

• The Canada-Alberta BSE Recovery Program put further downward pressure on cattle prices as producers rushed to sell their cattle for slaughter;
• There has been a shift in value obtained from cattle between the producers and packers, in favour of the packers, since the discovery of BSE;
• The three Alberta based packers benefited significantly from the impact of BSE on the price and slaughter volumes of cattle (281% increase in profit per head in terms of net margin and 174% in terms of gross margin, comparing 2002 yearly results with six month results from July 2003 to December 2003), as a result of supply and demand forces at work in a distorted market;
• Financial information shows that integrated meat packing operations of 3 major packers have performed substantially better post June 18, 2003 than preceding 3 years;
• The information received to substantiate additional operating costs to comply with new regulations is not complete nor uniform in scope. What is clear is that those costs have been much less significant than the increase in operating results; and
• The clear answer why beef prices are not lower at the retail level is that there is no surplus of beef at either the retail consumer or packer level for cuts that are popular in North America.

Scope

The scope of our analysis was the information submitted by five meat-packing companies based on various requests submitted on behalf of the Committee. The information provided by the companies has not been audited by their external auditors, although in some instances, the companies have indicated that they have reconciled the data submitted to their annual financial statements. The data we have used is for calendar years 2002 and 2003. The companies may report annual financial statements on a different year-end.

By December 3, 2004, all the companies had responded. The summary of our review is presented below.