Canada left Sochi with an impressive amount of medals, beating even Uncle Sam in the gold and silver count. What we didn’t beat them at was the bronze category – in medals or coins. Our loonie, that bronze-plated coin as Canadian as Timmies and as widely loved as the beaver, has been falling faster than Swedish patriotism. (Okay, maybe not THAT fast, but we have been on the decline after spending several years largely near par.)
There’s a myriad of reasons why this has happened, and many of them don’t even originate IN Canada. Our economy has softened somewhat, Asia’s growth has slowed slightly, and the EU is still struggling. Meanwhile, the U.S. has demonstrated some slightly positive indicators that have been excitedly embraced. Like a one-night stand, no one’s sure how good they are, or how long they’ll last. As an economics friend told me recently, “Explaining currency moves is an exercise in enjoying hearing yourself talk.”
So, rather than waste time on “why”, I think it’s prudent to start talking about how to deal with it and before we can even think of what’s next, we have to look at what came before. When I first started covering this business in 2007, it was in the tank. The dollar was creeping higher, and the industry was still suffering immensely from the aftershocks of BSE. The enhanced feed-ban mandating the removal of SRM was ushered in over the summer, adding another burden to the value chain. When Rule 2 opened the border to OTM cattle in November that year, the business failed to rally as some had hoped. The finger pointing started in earnest – my own included.
2007-2009 a period of
In retrospect, I think 2007-2009 was a period of intense turmoil not unlike the BSE crisis, but one that went entirely unrecognized as such. It was an incredibly divisive time, especially in the cow-calf sector, ultimately changing the dynamics of the business forever. The togetherness and teamwork we saw rise out of the ashes of BSE started to fall apart because producers became convinced that there was no recovery coming. Faith in the various initiatives introduced post-BSE to strengthen the industry was lost because producers saw each effort as a silver bullet, rather than just one piece of the puzzle. And who could blame them? It’s hard to think big-picture when your savings are wiped out and the wolves are at your door.
It was in this time period we learned the hard way that producer-owned packing capacity wasn’t going to work, no matter how badly we wanted it to. Smaller operations just didn’t have the depth they needed to get through those first few tough years. Even if they did, it was an uphill battle and even though Canada was (and still is) a net exporter of beef, the domestic market is still king. It’s the anchor the rest of the business is built around. Independent smaller packers can’t compete with the larger ones – not just because of the inherent economies of scale, but because the retail sector in Canada is so concentrated. Although retailers would prefer to have more major packers in the game, large chains are sometimes reluctant to source from multiple smaller suppliers because patchwork buying can represent supply disruptions. That can seem like too much risk to assume when a front-page flyer promotion requires a huge amount of beef to be successful. In other words, smaller packing plants can have difficulty readily accessing buyers to secure that integral domestic anchor.
Unrest and reorganization
Those tumultuous two years brought large-scale unrest into the industry, which was still reeling from BSE, while simultaneously experiencing very high feed costs, mCOOL as a trade barrier, and a very high dollar with significantly less foreign market access. This discontent ushered in a new period of significant change from 2010 until the fall of 2013. During this time, we saw producer groups reorganized in Saskatchewan, a bail-out package in Alberta, refundable check-off in Alberta, the establishment of ALMA, and the formation of Canada Beef Inc. as the industry’s new and unified marketing agency. And it was during this period that the industry began reinventing its image – in the marketing business, this is called rebranding. Although many still attribute this last wave of changes to BSE, the cause was actually the high value of our currency.
We saw our industry expand rapidly when our dollar was low because it was very easy to sell our beef at a discounted price in USD and still make good Canadian money at it. And we positioned ourselves in the foreign market as being First World beef suppliers at a bargain basement price. It’s an easy selling strategy to fall into, but an awfully hard one to climb out of. When we go into any market selling on price, we immediately sacrifice brand loyalty, and even more crucially, perception of value. It’s a short-term strategy that exchanges immediate profits for future sustainability. That’s exactly what we did, and it was a tremendous error in judgment.
But just how immense a mistake it was, we didn’t learn until we began to suffer through a par dollar. It’s incredibly difficult to have to raise the price of your product in a market conditioned to a lower entry point. And once the industry realized this, we started to realize that if we were to succeed in a par dollar climate, we were going to have to dramatically reinvent our selling strategy to position ourselves as a commodity worthy of commanding a premium price. As an industry, we invested an incredible amount of time, energy and money into doing so between 2010 and 2013.
A brave new world
However, it’s 2014 today and we’ve entered a new period, brought about by changing currencies. I fear we’ll squander all of these investments while we’re high on a lower dollar and very low supply. It’s imperative that we continue to stay the course with our new strategy, which positions us at the top of the beef chain – above the U.S. and Australia. If we start discounting our price now, we’re doomed to repeat history – but next time, we may not be able to recover, for a few different reasons.
First, we’ve invested heavily in our industry to give us a leg up on American beef. Traceability, SRM removal, carcass data feedback (soon), better genetics, and a more streamlined industry between provinces – these are all costly endeavours that have the potential to put us ahead of the pack if we leverage them.
Our other major First World competitor is Australia. And while they may be heavily invested in traceability and they invest a lot more in marketing, we have two distinct advantages – our cold-weather, grain-finished beef. We have a great story to tell – and the best part of it is that it’s not just a story – it’s the truth. If you objectively compare our product to America’s and Australia’s, we easily take the top tier of the First World beef-producing nations keen to export globally. But in order to seize and retain that position, we have to be comfortable wearing those boots – no matter what our dollar is doing. And we simply cannot claim the top tier of the First World beef business if we behave and sell like a second-rate player. There’s a reason why expensive wine tastes so much better, and a big part of that reason is simply perception. We can’t expect demand-pull buying if we’re supply-push selling.
And we have to be cautious – an .85-cent dollar is a lot different than a .70-cent dollar, which was the climate throughout much of our expansion era in the past. If we want our business to be sustainable and less vulnerable to currency fluctuations, we have to heed the expansion signals predicated on traditional supply and demand factors. As tempting as it may be, we cannot carve our margin out of currency advantages instead of our product advantages. By devaluing our product, we stand to lose much more in a par-dollar market than we’d ever gain in a low-dollar climate.
The third reason we have to be very careful to claim our place at the top of the First World beef tier is a threat we simply didn’t face pre-BSE… namely Brazil. Not only one of the top beef-producing countries in the world, Brazil has become a global player on the international feeding and packing stage because of JBS’ success. And while Brazil isn’t considered part of the First World club, the country is evolving quickly and steadily. Around the same time that JBS entered the U.S. market, the country began rapidly expanding its feeding sector – not likely a coincidence.
Unless world economics shift in an unfathomable way, there’s no way we can compete with Brazil on cost of production. And that means we can’t hope to compete with them on price. But if we start selling on price, that’s precisely what we’ll end up having to do. U.S. and Australia will claim the top tiers, and Canada will be left trying to differentiate our product from Brazil’s.
How we sell ourselves now will determine whether we become desired price-setters or desperate price-takers. If we’re shortsighted, we’ll discount-sell ourselves right out of a future. And after all we’ve been through, that’s a gamble we simply can’t afford to take.