Current Western Canada Beef Value Chain Approach

1
Current Western Canada Beef Value Chain Approach
Canada Wholesale/Retail
5
8a

• Backgrounder Feedlot
• 50 typically less than 3000
• 500 to 700 investment per head

• Western Canadian Processors
• Cargill, IBP, XL
• Annual Capacity 2.7 million
• Investment 200 to 300 per head

1

• Rancher / Cow Calf
• Annual Slaughter requirements 3.8 million fats
  700,000 cows
• 5,000 greater than 100
• 40,000 less than 100
• 2000 to 3000 investment per head

6
USA Wholesale/Retail
2
3
7

• Finisher Feedlot
• 25 typically more than 3000
• 600 to 800 investment per head

Other Country
1a
4
USA Processors
8b

• Characteristics
• Mass market commodity based
• Low cost focused.
• Retail / Processor Buying Power
• Co-mingled country of origin risk
• There are no premiums only discounts
• Live animal market dislocation risk is solely the
  producers subject to predatory pricing.
• No practical / reliable tracing from consumers
  point of view.
• Ownership and Control and Value Added is held by
  Processor / Retailer

Represents Auction Transaction less than 30
month cattle
Represents Auction Transaction of over 30 month
cattle

• 30 of animals go through backgrounder feedlots (
  2. 90 plus go traditionally into Canadian
  Finisher Feedlots)
• 1a. 60 go directly to finisher feedlots.
• Typically 50 to 60 of fat animals (US
  transportation net back without USA choice
  premium)
• Typically 30 to 40 of fat animals (US
  transportation net back Canadian Discount
• Typically 40 of cuts with higher percentage of
  premium cuts.
• Typically 50 of cuts with higher percentage of
  discount cuts.
• Typically less than 10
• 8a Typically less than 50 of supply
• 8b Typically more than 50 of supply

2
Next Generation Western Canada Beef Value Chain
Approach

• Ranchers Owners
• Now more than 30
• Ultimately the number that elect to own
• Over time, will reflect the number that combine
  to cover the vast majority of the capacity of
  the plant.

1

• Ranchers Feedlot
• More than 1/2 of the plant capacity owned
• Rest of Feedlot capacity organized by contract

• Ranchers Processing
• 250,000 capacity (easily doubled and can grow
  further with market)
• Flexible (cow / bull fats)
• Investment 200 to 300 per head

Ranchers Brand
White Label
4
3
2

• Characteristics
• Ranchers supply and processing separate from
  co-mingled mass market
• Differenced / Niche market based
• Value add based.
• Fully tracked vertical quality control
• Minimizes buyer discounts
• Creates opportunity to obtain premiums.
• Producers have opportunity to eliminate live
  animal market dislocation risk accept the
  wholesale meat market risk.
• Producers no longer subject to predatory pricing
  by processors.
• Ownership and Control and Value Added is held by
  Ranchers / Retailer

Represents Market Value Net-back Pricing

• Ranchers Brands BSE free by full testing
  Hormone free.. others Marketed to Canada USA
  Europe Asia
• Ranchers will custom develop and process for any
  other compatible brand.
• Owners can elect a quality adjusted market based
  price or can elect to pay custom processing fee
  and arrange market for the meat.
• Owners can elect to retain ownership of animals
  through feedlot and elect options under 3 or can
  sell to Ranchers for quality adjusted market
  based price

• Owners are hedged from discount live animal
  markets either through profits of Ranchers or
  Wholesale meat market less custom processing and
  custom feedlot cost approach.
• All interested parties (including governments)
  get market transparency.
• Ranchers ownership units will be listed and
  trade. Creates Private Sector Capital markets as
  source for growth capital Creates competitive
  tension with Legacy Processors.

3
Current Situation

• Western Canadian Beef Industry produces 30 more
  live animals than can be processed in Canada.
• Investment in production of livestock is 20 to 30
  times as much capital as is required in the
  processing industry.
• International borders are closed to live animal
  movement cattle and sheep.
• Over 80 of the processing capacity in Canada is
  in two American processing Plants in Southern
  Alberta.
• The international borders are open to meat with
  particular specifications.
• No other country in the world has a animal
  production industry that depends on this amount
  of international trade in live animals.
• Regulators, Trade agencies, Health Agencies are
  becoming more active as science moves forward and
  new tests are developed. It is not just BSE.

4
Depending on International Trade of Live Animals
Makes No Sense

• Health issues with live animals are infinitely
  more complex than with meat.
• Live animals have limited shelf life and have
  every day carrying cost.
• Live animals are a potential health risk to other
  live animals.
• The cost of processing is minor relative to the
  cost of producing the animal.
• The cost of transport of meat is much less than
  the cost of transport of live animals.
• Why export the employment opportunities
  associated with processing?

5
Why Did the Industry Evolve This Way?

• Western Canada is amongst the best locations to
  raise and fatten cattle.
• Environment is good, superior genetics, land that
  is less useful for other purposes, abundant
  cereal grains for feed. (The meat is superior
  meat).
• Processing was driven by economies of scale low
  cost - not value add.
• Main economy of scale was derived from the value
  of the non-meat part of the carcass.
• Small processors could not make up on the revenue
  side for the loss on the non-meat side.
• Now the main processors have buying muscle as
  well.
• Even though producers have much more invested
  than processors, they are many individuals.
• The producing industry had enough efficiency
  advantages to thrive even though it had access to
  a much inferior processing marketplace from a
  competition point of view.
• The discipline was their ability to export live
  animals to USA based plants.

6
Characteristics of a Lasting Solution

• Increase Processing Capacity so Domestic
  Processing is Able to Handle Domestic Production.
• Create the Next Generation Value Add Value
  Chain.
• Create Canada Based competition in processing to
  create a viable marketplace.
• Create value added specialty brands directly
  targeting specific markets whether in USA, Asia
  or Europe.
• Get away from the lose-all risk of the Canadian
  Brand.
• Create an environment that gives producers the
  option of investing in value added and marketing
  as opposed to being forced to accept the outcome
  of a non-competitive cost based marketplace.
• If producers had the option to create viable
  alternatives to the status quo then a number
  would evolve and the Government would no longer
  be exposed to risk that the trade in live animals
  is disrupted by other governments.

A portion of any government funding for BSE
related hardship should be targeted at
initiatives that Canadians control and solve the
market problem.
7
Ranchers Beef Ltd

• Who is involved?
• Sunterra Farms is the founder. Successful
  family-owned farming enterprise that has value
  added processing and specialty marketing in pork,
  veal and lamb. (Markets to Canada, Japan, USA,
  Mexico).
• More than 50 other producers have committed to
  purchase ownership. (Alberta, BC, Saskatchewan).
• Over 25 million of assets and over 15 million
  of cash committed.
• Ownership is open to anyone that wants to invest.
  (Subscribers continue to grow).

• What is Ranchers Business Objective?
• State of the art processing, combined with
  feedlot operations with ownership linkage to cow
  / calf and backgrounder.
• Will develop and market specialty branded beef
  products by organizing the supply chain to
  deliver a differentiated superior value to its
  customers.
• Business is organized so that producers are in
  control and own the profit that is generated by
  the value chain to the branded meat market.
• Customer driven profit based.
• It is the first real example of the Next
  Generation Value Chain organized for the future
  as opposed to the past.

8
What Does Government Need to Do?

• To date, the Government supported initiatives
  have been supporting the status quo.
• Unless the domestic supply / processing imbalance
  and the lack of competition and diversity in the
  processing sector is addressed, the benefactor of
  government support programs will be large
  existing processors. (As has happened to date).
• Governments need to financially support the
  transition to a new domestic market-place which
  gives producers the option of investing in value
  added and creates the appropriate domestic
  competitive tension with the large commodity
  based processors.
• Ranchers is an example
• Federal government should agree to match
  provincial government funding for such
  initiatives.
• In Ranchers case, we are proposing that if the
  Private Sector raises 25 million of equity, that
  the Province of Alberta and the Government
  provide funding of 10 million.
• Governments can support a number of these type of
  initiatives. (Three Ranchers sized initiatives
  would bring domestic processing in line with
  domestic production).