We have lots of cows in Canadian Agriculture, but we also have some sacred cows a well. One of these is the ability to shelter income through the cash method of reporting farming income. For those who don€™t know how this works, it is a simplistic formula whereby as long as you have more expenses than income you have a farming loss and therefore will not be required to pay taxes. There are various methods employed to create expenses or defer income, but one of the main methods is to buy cattle before year end thereby creating a loss and defer tax. The key word here is defer. The taxes are still payable at some point in time. All a farmer is doing is putting off the inevitable. This is a great way to incentivize an industry and along with programs like NTSP (the National Tripartite Stabilization Program) it did just that. I submit we don€™t need to grow this industry, we need to make it profitable
So now that we have grown the industry what has been the result. We have an industry that is unsustainable in its€™ present form. We have infrastructure that we don€™t or can€™t utilitize and remaining participants fight for shrinking resources. It is simply a war of attrition. It is truly Darwinian in that only the fittest will survive. The reality is that noone may be standing at the end of this prizefight. It€™s kind of like in World War Two when the Allies were liberating Europe. After carpet bombing a city that I can€™t remember the name of one and literally flattening all the infrastructure that stood above and six inches below ground one GI was heard to remark how €œwe sure liberated the hell out of this place.€ Well, we€™ve sure grown the hell out of the infrastructure in this industry unfortunately with the same result.
1. We have excess capacity at the feedlot level, as there are not enough feeders to fill the existing capacity. Many of the midsized feedlots have ceased to exist as they are too small to achieve economies of scale and too large to achieve the efficiencies of the smaller operations.
2. We have many acres of grass underutilized as ranchers are unable to make a return, and in the last downturn many of the small cowherds have gone out of business as people are just plain tired of working off farm to support a cowherd that drags a person out of bed at minus thirty to calve a cow that€™s going to lose two hundred dollars annually.
3. We have an industry that must export to survive given current production levels. We are high cost producers of product that is discounted in our major market (the U.S.) due to non tariff barriers, competition from low cost producers such as Brazil and branding issues not to mention COOL legislation.
4. We are down to two major packers in the country either one having the capacity to satisfy all domestic needs.
In short it is not unheard of to have all sectors of the industry (the cow calf, the backgrounder, the finisher and the packer) losing money at the same time. In order to be profitable we need to allow this industry to find equilibrium without the artificial impediments that presently exist.
I submit that one of the major reasons this industry is in trouble is that decisions are not being made based on business but on sheltering taxes. How many people still go to their accountant to find out how many cattle they need to own to get over year end and then put out orders for cattle not based on a business decision but on the dictum €œI don€™t care but Ottawa isn€™t getting any of my money. But it gets better. So a bad business decision is made and the person loses money because he paid too much for the cattle because he is more worried about sheltering income than making good business decisions. So what does the Government do? Through Agristability it reinforces bad behavior by potentially making a program payout because the person lost money. How much sense does that make? Even the banks support this program as they add back future taxes when making net worth calculations on a person€™s financial stability. In their world a future tax liability is not really a liability at all.
This policy is causing the industry to die by inches. People continue to make decisions based not on supply, demand or business environment, but in the present environment if the money is not spent, the taxes become due and payable and the person is out of business. I have been told that many farming corporations have a future tax liability that equals their retained earnings.
I am not suggesting that all taxes become payable immediately, but there are alternatives. If we don€™t do major surgery it will be I fear damaged beyond repair. It can start with tax reform
1. Freeze the future tax liability on the Balance Sheet where it is right now and no longer allow an individual to shelter future profits from feeding cattle to be exempt from taxation. From this point onward have agriculture report on the accrual basis of accounting. I don€™t want to pay anymore taxes than anyone else, but I do believe that this will give an opportunity to put the cattle business on solid footing where good business as opposed to good tax shelter decisions are made.
2. Grant a Tax Amnesty for the future tax liabilities that are presently on the balance sheet. This isn€™t silly as it sounds as the Government would trade this off for receiving the tax dollar infusion from cattle profits made from this point onward. This is long term pain and short term gain regarding tax revenues in this country but overall I wouldn’t think that revenue streams would differ significantly although I can’t quantify this.
3. Make everyone pay as they go from now on. The industry gets both the carrot and the stick but is allowed to go forth and sin no more and most importantly MAKE GOOD BUSINESS DECISIONS AND BE PROFITABLE