Harry's flock on The Rock

Just outside St. John's, Newfoundland, nestled in the hills overlooking the Trans Canada Highway, you can catch a glimpse of what's affectionately known as "Harry's dream" - a chicken production complex that houses more live chickens than any other one place in Canada.

Here, amongst a forest of Spruce trees, sit 10 new state-of-the-art chicken barns, each with a 90,000-bird capacity. The barns also hold the hopes and aspirations of 20 Newfoundland chicken producers who fear their industry won't survive should Canada's supply management system topple.

Call it vertical integration, Newfoundland style. The east coast island complex will produce about 5.6 million birds annually, raised on feed from its own feed mill, before birds are processed at the newly acquired processing plant.

Harry (the Dreamer) Andrews, a long-time Newfoundland chicken producer and spokesman for the provincial industry, is the man behind Integrated Poultry Ltd. (IPL). He's also a passionate supporter of supply management. So how does a man who in 1993 went nose to nose with GATT chief Arthur Dunkel in Geneva in Canada's fight to maintain supply management end up in the integration business?

"We were behind the eight ball," says Andrews, a former banker who now serves as IPL's CEO and chairman of the board. After failing to win a secure future for supply management at the GATT, producers watched helplessly as the federal Liberal government dismantled the Feed Freight Assistance (FFA) program.

With the loss of the FFA, which paid east coast farmers up to $50 per tonne to subsidize feed transportation to the island, the future was bleak. Even before the FFA's demise Newfoundland's costs were much higher - about $1.70 to produce one kg of chicken on the island compared to $1.20 per kg for Quebec and Ontario.

Integration was the answer. In any business, there has to be a profit centre, says Andrews. "By acquiring the business, you acquire the profit centre. Our goal was to eliminate the profit and use it to reduce the cost of production."

Unlike typical U.S. chicken integration where farmers have become servants to corporate masters, Newfoundland producers will hold the corporate clout, Andrews says: "That's the difference between integration Newfoundland style and Mr. Tyson in the U.S. In the U.S. contract growers are serfs on their own land."

To stay in business, Andrews and the other farmers decided they had to carve about 40 cents off their $1.70 per kg cost of production to compete with Quebec and Ontario. It costs between 10 and 12 cents to ship one kg of chicken across the 90 miles of Atlantic ocean that separates the province from the mainland. "We have the most effective trade barrier in all of Canada," Andrews says.

Here's how the plan unfolded. Bird production was moved to the growing complex outside St. John's, increasing productivity and reducing transportation costs. "When we had farms scattered over the island, a truckload of birds from the west coast would cost $1,306 to get to processing in St. John's. (From east to west, Newfoundland stretches about 900 kilometres, about the distance from Windsor to Montreal.) Transportation from the new site costs $250 per truckload, says Andrews. "We're saving $11,000 a week."

IPL also leased a processing plant from the province. At the St. John's plant, high-tech equipment was added to increase efficiency, pushing processing capability to 140 birds per minute, as fast as the top plants in Ontario. The company also agreed on a labour contract with one of Newfoundland's most powerful unions. The company then had to address the most pressing problem for Newfoundland farmers - feed cost. With little grain production in the province, and the death of the FFA, IPL faced a giant hurdle. The answer? Buy your own feed company.

Masterfeeds was a perfect fit for IPL, says Andrews. Moving the birds to the complex on the east coast allowed the company to close Masterfeeds' west coast operations. "We doubled the capacity of the feed mill with the same asset base," says Andrews.

And how about cutting the cost of feed inputs? "We're learning how to hedge," says Andrews, who's getting a crash course in the feed business.

IPL will be fully vertically integrated when it acquires a rendering plant and hatchery, deals the company hopes to hammer out in the near future. Manure will go to local livestock growers and forage producers, but IPL is looking at a dehydration process and plans to sell for export as dried fertilizer.

But how do 20 farmers scrape together enough money to finance such a venture? A good business plan is essential to attract capital, but a provincial government wanting to unload a money-losing processing plant also helps. The price tag for the venture so far has reached $22 million, with the production complex costing $11 million. About $4 million came from growers' pockets, including private loans and Canadian Adaptation and Rural Development fund money and government cash designed to help growers deal with the loss of the FFA.

The Farm Credit Corporation and the banks also put up money, but it was the province that made the deal. Brian Tobin's Liberal government was losing a fortune annually on the processing plant and wanted out of the business. After some tough negotiations, IPL agreed to lease the facility for $1 and accepted an $8.5-million grant to operate and improve the plant before it could be made profitable.

It was a great deal for the province, Andrews says. "They were throwing $10 million down an empty hole every year."

Now the government is off the hook - almost: It also put up a $10-million loan guarantee. "The banks wanted Father's guarantee," Andrews says. But the province is well protected, he argues: If the venture fails, the government will own practically everything, including the farmers' quota.

What IPL needed from its farmer-owners was their quota, which is leased to the company. Butit was a tough decision for many of the growers. Ten area farmers still operate as contract growers for IPL, producing 4.2 million birds annually, but the other half further afield sold their farms to make the venture work. Each of the 20 farmers is an equal partner in the company, but removed from the day-to-day operations. Asked whether the model would work for the rest of Canada, Andrews replies IPL's is a unique situation: "Unfortunately, there are going to be few other Canadian chicken producers who will have the same opportunity as we had here in Newfoundland.

"I had some difficulty trying convince these guys that they had to give up their right to farm and convince them to put in about $4 million of their money. [But now] the people who have the most blood and sweat invested in the industry, the farmers, own the industry."

With standardized management and genetics turning out a consistent bird, Andrews says IPL will soon be ready for the world. Don't expect to find IPL labels outside the Rock, however. When the company hits peak production it will produce 200,000 birds a week or 70 to 75 per cent of Newfoundland's domestic consumption.

Can a rag-tag fleet of chicken farmers on an island known more for fish than feathers stay afloat in the perilous waters of freer trade? "We'll survive," says Andrews. "We're not there, but we've got a hell of a lot more hurdles behind us than there are ahead of us."

Would Integrated Poultry Ltd. fly in Ontario?

Simcoe, Ont., broiler producer Jim Judge, who has known Harry Andrews for years, is finding it tough getting a producer-owned processor along the lines of IPL off the ground in Ontario.

Judge, who sat around the Canadian Chicken Marketing Agency boardroom table with Andrews in the 1980s, says in Ontario he and a group of growers have met with resistance every step of the way in getting more birds into their Harriston Farm Fresh Poultry Co-operative plant. Both Judge and Andrews are chicken producers looking for more control for growers in the chicken industry by venturing into the processing side.

Farm Fresh, which is owned by 30 producers, started out with 450,000 kgs of supply after purchasing the Ungerman/Thompson processing plant in Harriston last year. Since then, Farm Fresh supply has increased to 650,000, but every kg was hard won. Chicken Farmers of Ontario, the Association of Ontario Chicken Processors (AOCP) and the Farm Products Appeal Tribunal have all put up barriers. Eventually, an appeal directly to Agriculture Minister Noble Villeneuve paid dividends, with an extra 105,000 kilos.

But Villeneuve refused Farm Fresh's request for a plan for growing supply to two million kg, which Judge says was the most important part of the request. Farm Fresh wants to grow and there is room in the Ontario market, says Judge. The problem is about 27 processors fighting it out for a piece of the pie.

The power of processors is one example of how the IPL set-up in Newfound-land has a huge advantage over Ontario producers, he says. The only processors Andrews and IPL had to deal with in Newfoundland were government run and losing money. "Jim is a small fish in a large poultry pond," agrees Andrews.

There were 1,064 chicken producers in Ontario in 1997, as opposed to 20 in Newfoundland. There are 13 registered hatcheries in Ontario while there is only one on the Rock, which IPL is currently negotiating to buy from Maple Leaf.

"The only way they could survive in the poultry business" was by all 20 producers banding together and integrating production, Judge says. "Still, it's something people said wouldn't be possible even in Newfoundland."

Marvin Ungerman, who recently set up a broiler operation in Port Perry that accommodates 46,000 birds per crop, can see the appeal of such a system. "If you own the feed mill and the hatchery, there are your two biggest expenses right there," he says. Plus, as a processor, you wouldn't have to pay market price for slaughter-weight birds.

But Judge finds the chick industry even less competitive. There are only three major producers of chicks for the broiler industry, he says: Maple Leaf, Maple Lodge and Cuddy Foods. Farm Fresh "may look at a hatchery down the road," he says.

Meanwhile, large processors are trying to sell growers on their own version of vertical integration, a system closer to that of contract growers in the U.S., says Judge. Under this system, processors would provide producers with chicks and feed, then deduct those costs from the final price paid. "So instead of $1.18 today, it might be 40 cents," he says.

AOCP spokesman Robert Shapiro says the system would be supported by some, but not necessarily all, processors. Maple Leaf and Maple Lodge are the only companies that own both hatcheries and feed mills, he says. Cuddy Foods and Schneiders own hatcheries but not feed mills. The remaining 14 members of the AOCP could align themselves with hatcheries and feed mills to service their producers, he suggests.

It would allow processors to better supply the market: "By knowing what chicks are used and what feed goes into them, processors can better control the end product," he says.

But the system takes choices away from growers and puts them in the hands of processors, says Judge. Claims that the system would create less disagreement between the parties are not realistic, says Judge.

The main bone of contention - how much producers get paid for their birds - would remain the same: "They'll meet with resistance to that system here." - Christina Selby

© copyright 1998 Agricultural Publishing Company Limited.


back