Purpose and Approach
This insight is a follow-up on the July 11, 2013 CFO News Insight when CFO communicated the decision advanced by the Ontario Farm Products Marketing Commission (“the Commission”) to amend the section of Regulation 402 that relates to the calculation of the feed price component of Ontario’s live price for chicken. This News Insight is intended to provide industry stakeholders with the appropriate context and information about the implication of this decision.
A hypothetical set of feed cost data has been used to illustrate the calculation of the feed price component of the live price that would be in effect in A-120 given the amendment to Regulation 402 relating to the feed price component of the live price.
Background
The minimum price of live chicken in Ontario is calculated in accordance to Regulation 402 of the Ontario Farm Products Marketing Act. The regulation also states how the feed and chick components are adjusted in each quota period. It specifies the following formula:
minimum live price = producer margin + chick price + feed price
This regulatory live price formula has been in place and successfully implemented since May 4, 2003 for quota period A-52.
What has changed?
The pending change imposed by the Commission relates to the feed component. Currently the regulation states that “for every $5/tonne change in the feed price, the minimum live price will be adjusted by one cent in the corresponding direction”. This section will be changed to “for every $5.81/tonne change in the feed price, the minimum live price will be adjusted by one cent in the corresponding direction”.
Regulation 402 states that the feed price component of the live price is “as set for Quota Period A45, and adjusted as necessary in accordance with this Regulation”. A hypothetical example of calculating the feed price component of the live price is provided below.
Hypothetical Example
Feed price component in A-45 (A): 49.99 cents
Feed price in A-45 (B): $242.79/tonne
Hypothetical feed price in A-120 (C): $400/tonne
Feed price adjustment factor in A-120 (D): 5.81
Feed price component in A-120: = A + (C – B)/D
= 49.99 + (400 -242.79)/5.81
= 77.05 cents
Note: CFO had provided a without-prejudice feed price accommodation of 1.5 cent reduction to the live price in A-111 in response to concerns over the feed price component of the live price raised by the Association of Ontario Chicken Processors (AOCP). This accommodation will now be eliminated effective A-120.
Impact
The actual impact of the change will be known once the average feed price data required to calculate the live price for A-120 becomes available. The required average feed price will use data from the last four weeks of A-118 and the first four weeks of A-119. Feed prices are determined in accordance to Regulation 402 by the Ontario Agri-Business Association, and are based on the weighted average price of four independent feed mills in Ontario. When the required data becomes available, the A-120 live price will be negotiated between CFO and AOCP as per Regulation 402. The agreement between the two parties will require subsequent approval from the Commission.
Timing
The effective date of the change to the regulation is for quota period A-120 which begins on October 6, 2013.
In the meanwhile, CFO is working collaboratively to develop a long term, comprehensive and transparent cost of production formula (COPF) which is planned to be implemented by regulation in A-121. When this happens, the new pricing mechanism would supersede the interim change imposed by the Commission.
As always, CFO will endeavor to keep the industry informed of any other pricing-related news in the future.
Source: CFO