Thursday, February 28, 2013

Chicken Monopoly Pricing

Have you been wondering why your weekly grocery bill keeps going up?

In part, perhaps it's caused by the monopolistic actions of Ontario's marketing boards.

Almost all of Ontario's chicken is produced in mega chicken factories.  These chicken producers, lead by their monopolistic marketing board, the Chicken Farmers of Ontario ("CFO"), must be doing something right.  It is truly amazing how chicken has taken over the Canadian marketplace since 1971 (see CFO`s Chart 4 below).  Unfortunately, it has been at the expense of farmers who raise beef, pork, and turkeys.


Typically, whenever an industry is able to increase its total production volume and their market share, this usually means that industry`s fixed overhead costs can be spread over a growing production volume, thus providing lower cost of production, and dropping prices for the consumer.  Unfortunately, Ontario chicken doesn't follow this logical and typical expectation.


In the CFO`s Chat 1 shown above, the "A-80" to "A-114" scale on this graph refers to each chicken production cycle.  A chicken production cycle starts with the filling of the chicken factory with day-old chicks, then raising them to market weight over the next 8 weeks, then collecting the full-grown chickens and shipping them off to the slaughter plants).  Cycle A114 occurred in the Fall of 2012.

As you can see from CFO's own data, the cost of chicken on a $/kg basis has been steadily rising.  CFO says that the major factor that controls the price of chicken is the cost of the feed that the producers need to feed those chickens.  Note that the cost of chicken closely tracks the cost of the feed that the mega-factory chicken producers pay for the feeding of those chickens.

However, take a closer look.  Note that the two lines get closer and closer together as we go forward in time.  CFO drew this graph so that feed prices is above the chicken prices, perhaps to disguise the fact that their profit margin is rising.  That means that the price of chicken is slowly, ever so carefully controlled by CFO, is going up faster than the price of feed.  CFO sets the selling price for all chicken in Ontario.  It seems that CFO has applied the "boiling frog" methodology to maximize their market share of the meat market, and consumer acceptance of those rising chicken prices.   This data suggests that chicken producers aren't getting any more efficient, they just pass on their rising production costs to the consumer, and then add on top even more profit for themselves.

CFO summarizes Stats Canada statistics in as follows:
  • Over the last 9 years, consumers have suffered a retail price increase of 38% for fresh chicken.  In spite of this price increase (or because of it), consumers spent 5.9% more of their weekly grocery money on chicken in 2012, as compared to 2011.  In spite of this ever rising price increase, chicken sales in 2011 were also up by 4.3% over 2010.    (Ref:   op. cit.)
  • Compare chicken to the cost of other fresh meat in Ontario`s stores.  Chicken prices have risen far faster than the price of beef , pork, or turkey.
  • Chicken has the biggest share of the fresh meat protein market, 33.3% in 2012, so a rise in prices for chicken has a huge effect on the total grocery bill for Canadians.     (Ref:   op. cit.)

  • In spite of Toronto being one of the largest markets for chicken, and being geographically close to CFO's major chicken producers and the major slaughter plants, in 2012 Toronto had to pay a 4.2% premium for fresh whole chicken when compared to the rest of Canada.   (Ref: ).
I wonder why? 

1 comment:

  1. RE these sentences - "It is truly amazing how chicken has taken over the Canadian marketplace since 1971 (see CFO`s Chart 4 below). Unfortunately, it has been at the expense of farmers who raise beef, pork, and turkeys."

    This is a consumer-driven shift in demand. Consumers believe that chicken is healthier than beef or pork. Whether that belief is true is moot - perception is reality.


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