AGRI Committee Report

Summary Analysis

Our analysis is presented under five main headings which correspond with the information that was requested from the companies, based on the Committee motion of March 29, 2004.

Added marginal costs attributable to BSE safety costs

Companies have reported information on such costs to a varying degree and in different formats. Most have indicated that they do not segregate such costs separately in their financial records. The financial information from the companies indicate that their overall expenses have decreased by approximately 2% for the period July to December 2003 as compared to the same period for 2002.

The data provided is not in a meaningful format to compile the dollar impact of added marginal costs. However, our analysis confirms that there was an increase in expenses, as a percentage of sales, during the last six months of 2003, reportedly attributable to increase in marginal costs due to BSE related regulations.

Explanation of why the prices the companies paid for steers and heifers dropped by 50% in the three weeks following the BSE recovery program announcement

The data provided by the companies is not consistent. Some report prices they paid for cattle (as opposed to steers and heifers) whereas others have quoted or referred to market prices per the George Morris Centre, and not provided any additional information. In one case, the company reported that they do not deal in steers and heifers.

Impact on Profit Margins on a monthly basis

Comparing the financial results year over year from January to December between 2003 and 2002 show the following:

1. Decrease in sales: 17.50%
2. Increase in gross margins : 12.90%
3. Increase in net margins : 84.55%
4. Decrease in expenses: 1.22%

A breakdown shows the following increase (decrease) in comparing the calendar year 2003 with the calendar year 2002.

	January to April	May - June (BSE detected May 21, 2003. BSE Recovery Program announced June 18, 2003)	July - December
Sales	5.21%	(40.74%)	(22.88%)
Gross Margin	7.57%	(67.60%)	44.91%
Net Margin before Income Tax	(389.83%)	(209.85%)	223.45%
Expenses	10.44%	(17.89%)	(2.32%)
Increase (Decrease) in Net Margins in dollars	($5.7M.)	($84.0M.)	$196.7M

The above analysis indicates that gross margins for packers increased significantly and the net margins increased even more substantially post BSE. Overall, the packers had substantially better profitability year over year.

Additional Financial Information

The packers have provided information on inventories, inventory valuation practices and in some cases, a breakdown between domestic and export sales. Inventories are valued on a consistent basis among the various companies.

Explanation on the effect of fed steer and heifer market following the BSE program announcement as far as your company is concerned

Some companies indicated they had nothing additional to offer beyond comments made in previous testimony to the Committee. Others have offered anecdotal comments of general nature mainly relating to market forces.

Conclusion

The five companies, on an aggregate basis, had a much better financial performance in 2003 than in 2002. In the last 6 months of 2003, both their gross and net margins were substantially higher than the comparable period in 2002. As the producers suffered a significant decline in prices, comparing the last 6 months of 2003 to the similar six month period in 2002, it is fair to conclude that there was value transfer in favour of the meat-packers.

Our analysis confirms that there was an increase in expenses, as a percentage of sales, during the last six months of 2003, reportedly attributable to increase in marginal costs due to BSE related regulations. Despite those increases, the net margins of the packers improved substantially in the July to December 2003 period as compared to July to December 2002.

Sufficient information has not been provided to determine what prices the packers paid to producers or feedlot operators for steers and heifers post BSE recovery program announcement.