“We’re all seriously suffering from a kind of Trump derangement syndrome…he uses up so much of the oxygen and it’s like having…a big air horn installed in your head and you just can’t get away from it.”— Garry Trudeau, the Pulitzer Prize winning creator of Doonsbury
Sadly, Albertans have their own version of air horn politics and it’s interfering with our ability to understand the economic challenges we face.
But we can try.
Let’s start by reviewing the big (or in Donald Trump’s vernacular “yuge”) news of the week.
Saving the economy
Finance Minister Ceci anticipates a modest recovery in 2017 (the Conference Board of Canada agrees with him) and announced more loans to small businesses through ATB Financial.
Rob Horricks, CEO of Blush Lane Organics is grateful for the government’s help and says “this is the perfect time to be opening new stores and new businesses.”
Wildrose finance critic Derek Fildebrant says Mr Ceci is nuts.
He says (cue the air horn) ratings agencies won’t have confidence in Alberta unless the government gets over its concern that “cutting a single dime of public spending” will be catastrophic to the economy.
Recently the government cut spending by $3 million (that’s a lot of dimes) by not mailing reminders to people whose vehicle registrations were expiring…and was lambasted by car owners who got fined for driving with expired vehicle registrations. So much for getting rid of the “nanny state”.
More importantly, Mr Fildebrant ignored the fact that on Sept 7, 2016 DBRS expressed its confidence in Alberta by confirming its bond rating at AA high (stable).
DBRS said Alberta has “moderate flexibility” at this rating and with these oil prices to withstand even more “economic and fiscal deterioration” and that Alberta’s “debt burden is expected to remain relatively low” when compared to the other provinces.
The point Mr Fildebrant should put his mind to is DBRS’s conclusion that if oil prices don’t recover and stabilize Alberta may need to make further spending cuts and impose higher taxes.
Fildebrant’s solution to the economic downturn is (cue the air horn) (1) roll back personal and corporate tax hikes, (2) ditch the carbon tax and (3) stop the minimum wage hike to $15/hour by 2018. Apparently these three measures will rescue the economy.
Which brings us to the Western Feedlots example.
Western Feedlots Ltd (WFL) will close its doors in 2017.
WFL’s CEO says the carbon tax and Bill 6, the farm safety legislation, are “prohibitive to competitiveness”.
Oh, and precipitous drop in cattle prices over the last year didn’t help any.
It’s difficult to get detailed financial information about WFL because it stopped filing public documents when the majority shareholders bought out the minority shareholders in Aug 2000. However we do have access to the PwC valuation report* which provides a snapshot of the business up to that time.
WFL buys cattle, feeds them and markets them to beef packers, primarily Cargill Ltd. It also feeds and markets cattle owned by ranchers. Its profits are “extremely sensitive to fluctuations in feed, calf and finished cattle prices.” In 1998 sky-rocketing feed costs cut gross margin to 5.5%, roughly half the gross margin of the previous year. (5.44, 5.45 PwC Report).
Did the new carbon tax sound the death knell?
In a recent tweet U of C economics prof Trevor Tombe (@trevor tombe) compared the impact of the carbon tax with the 25% drop in prices. The impact was less than $1 per one hundred pounds of cattle ($1/cwt).
$1/cwt is small compared to the drop in price, but is it small in absolute terms?
PwC says WFL charged cattlemen a fee of $1/cwt to participate in a program to get better prices from Cargill for better beef (more marbling for example). The program was called Value Based Marketing (VBM).
The purpose of VBM wasn’t to make a profit. It was more like a loss leader to give WFL information about the quality of the herds running through its feedlots so that WFL could make better cattle buying decisions in the future. (para 5.18 PwC Report).
If the $1/cwt VBM fee didn’t break the bank in 2000 it’s unlikely that the $1/cwt carbon tax would do so now.
What about expenses related to Bill 6?
Economics and agriculture prof Sven Anders says the government’s decisions (like Bill 6) will increase expenses but the real problem is that two large beef packers, Cargill and JBS USA Holdings, dominate the market leaving feedlot owners with very few options when prices fall. This structural problem is very much like Alberta oil being at the mercy of one major buyer, the US.
The challenges facing Alberta’s economy are complex.
They deserve a better response from the Official Opposition than simply cranking up the volume on the air horn and blasting whoever comes within range.
*The PwC report report is available at http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00011585