Wheat Stocks At 12 Year Highs

From Seeking Alpha: Global Wheat Stocks At Highs Not Seen In 12 Years

 

The USDA published its World Agricultural Supply and Demand Estimates Report and as expected, export demand issues caused estimates of ending stocks to rise to their highest levels since the 2000/01 growing season. Falling demand for US exports is due to increased global supplies and more competitive pricing caused by the debt crises in Europe, which has caused the dollar to strengthen against the Euro.

Global Supplies

Estimate of global wheat supplies are 9.3 million tons higher in large part due to increases in production around the globe. Upward revisions to beginning stocks in Australia and Argentina also contributed to higher supplies.

These production increases lead in to increase in global ending stocks of 5.9 million tons to 208.5. Ending stocks have not been near these highs since the 2000/01 season when ending stocks were 207.7 million tons. I should also note that during the 2000/01 season the average EUR/USD exchange rate was 0.95 and according to historical USDA data, the U.S. farm price for wheat averaged about $2.62 per bushel. I do expect the Euro to weaken further against the dollar. However, I don’t see the Euro trading at parity with the dollar at least for the foreseeable future.

Imports and Exports

Estimates of global wheat imports for the 2011/12 season are higher due to more demand for imports in Southeast Asian Countries and Mexico. Mexico says that tight domestic corn supplies are boosting demand for imported feed quality wheat. Australia and Argentina have raised exports 2.5 million and 1.0 million tons respectively due to competitive pricing with Black Sea and North American wheat supplies. A reduction in exports of 1.o million tons for the Ukraine and 1.4 million tons for the U.S. seem to corroborate the price competitiveness cited.

Consumption

Higher expected foreign wheat feeding, presumably due to tight corn supplies, has raised global consumption estimates by 3.4 million tons. However, this is not enough to overcome the 9.3 million ton increase in global supplies.

So what does that mean for Canada Bread?  Or Franchisees?

If wheat stocks are high, then if/when Canada Bread raises prices, or tries to revenue share, the reason of “higher commodity costs” cannot be used again.

 

Why does Canada Bread choose not to answer our questions?

Canada Bread is not answering any questions.  They are threatening and intimidating Franchisees by saying a lawsuit will destroy our equity or devalue the brand.

Why are they drawing that line?

I think it’s because they are scared to come to the table.

• Maybe they can’t explain or answer questions on what happened in a coherent and logical manner to another professional such as an external accountant or lawyer?
• Maybe they don’t want to explain what happened because they feel they can operate as they see fit and should not have to explain anything to Franchisees?
• Maybe they don’t want to explain or answer questions because they know the answers will incriminate them?

 

I’m sure we’ll find out soon enough which is the reason.

Private Label: Who wins?

The NBN has done numerous studies on the impact of private label products that mirror branded products.

There are three parties who split the “pie”:

• Customer (account, not consumer)
• Franchisee
• Canada Bread

So, when a Private Label product is launched, who wins?

Canada Bread is the big winner.  Their profit margin increases substantially, while Franchisees lose almost 50% of their revenue compared to the branded product counterparts.

When it is on feature that disparity exponentially increases and Franchisees lose significantly more money.  Each week this costs Franchisees  thousands of dollars.

Inflation? Is it a measure of success?

Canada Bread compares it’s Franchisee’s revenue earnings to inflation.

If Franchisees are “outpacing” inflation then, according to Canada Bread, Franchisees are doing better than the average Canadian and should not be asking questions or searching for information from Canada Bread.

Interview With Michael McCain

Interview With Michael McCain from Diane Francis at the Financial Post

Maple Leaf Foods Inc. has been in the news recently after unveiling a new five-year strategic plan to revamp its business and after a 30% jump in its stock price since August when a shareholder agreement ended between the McCain family and the Ontario Teachers Pension Plan and investment firm West Face Capital Inc. bought one-third of the Pension’s stock holding. CEO Michael McCain spoke this week with The Financial Post. His family owns 32% of Maple Leaf and also one-third of privately-held global french fry giant, McCain Foods Limited of New Brunswick.

Q Teachers sold why?
A “Teachers sold one-third of their position which means they own 25%, the family 32% and West Face 10%. Teachers is in the asset allocation business and they have been doing selling recently. I’m in the food manufacturing business, not asset allocation. West Face is in the investment business.”

Q How has Maple Leaf stock fared?
A “Our stock’s been flat and that’s not good, but the S&P500 is worth less than it was 12 years ago and the stocks of our two main US competitors, Kraft Foods and Sara Lee Corporation, have gone down even though they did not suffer a currency problem or a product recall crisis as we did. I tell our employees this is cold comfort but it’s the context.”
“We’ve dealt with four years of adversity. The economic impact of the higher Canadian dollar costs Maple Leaf Foods in excess of $130 million a year, and the product recall [the listeriosis outbreak in 2008] is costing $80 million a year. In 2009, that’s a total of $210 million against cash flow of $344 million, or 60%. The recall’s effects, which are recoverable, resulted in an immediate 55% reduction in volumes in our premium brand and the entire category went down by 25%. We have been recovering those volumes and are at 90% of pre-recall levels. To do this, we have had to compress margins.”

Q Have you suffered any negative effects from the financial collapse of 2008-09?
A “We are a rather recession-proof industry, but the collapse in markets hurt our pensions which is costing the company $30 million a year out of earnings. Even so, earnings in 2010 should be ahead of last year by 8% to 10%.”

Q What’s the strategic plan and background to it?
A “The plan, costing $1.3 billion, is to close the productivity gap. It includes our normal capital spending of $175 million a year but also includes strategic capital. We have a productivity gap, the legacy of a 65-cent dollar and now we have the opportunity to close this and we need shareholder support.
“Fifteen years ago, when we got into this business, we spent the first ten years making 30 acquisitions in the protein and bakery segments, brought their products into either number one or number two positions in the markets and finished our industry rollout in 2004. We hoped to harvest all our hard work but it didn’t happen. The Canadian currency began to appreciate and between that year and 2010 the dollar increased by 50%.”
“Our acquisitions were spread across the country which were competitive only at a 65-cent dollar. We were making hot dogs for 34 million people in Canada in six locations and our competitor Kraft was making hotdogs in two or three locations for 307 million people. The productivity gap is, for instance, if a new technology comes along and I want to invest $20 million, I have to buy six of those technologies. If the six plants are closed and one large-scale plant replaces them I have to buy the technology only once.”
“We began restructuring in 2007 because of damage from the stronger dollar then the product recall tragedy happened. We would have been having this conversation two years ago but the crisis set us back a couple of years. For a couple of years, we have been sending teams of engineers to do cost benchmarking in the US and Europe and they found that our manufacturing costs were 15 to 25% higher than the best in class, in a thin margin business. We had to invest in scale and in technology. Every economist in this country has been chiding business to solve this productivity gap and our plan will do that. So why shouldn’t capital markets support that?”
“The average plant size in the US is 2.2 times’ bigger. Our plan, which will give us scale, through new facilities and technology and simplified product lines, will greatly improve our results, based on dollar parity. By the way, the higher Canadian dollar has one benefit. It makes the new technologies to enhance productivity more affordable because these are imported from the US and Europe. What would cost C$20 million today for US$20 million in technology would have cost C$30 million [of 65-cent dollars] to buy US$20 million in technology.”
“We are undertaking product portfolio simplification which has marketing and operational aspects. Consumers are clearly telling us that simplifying our categories is a preference, there are too many complications in the shopping experience. We have well over a dozen combinations of a single product based on size and diameter. We don’t need that. We can consolidate with no difference to the consumer. Obviously this simplification means higher volume batches which enhances productivity too.”

Q I understand you have also taken a hit from American exporters as our currency increases and theirs decreases?
A “In the protein business the US manufacturers have doubled their market share from 4% to 8% since our dollar began to rise. In the past two years, 25 food manufacturing plants in Canada have closed involving 5,000 jobs. The J.M. Smucker Company shut two plants and moved operations to a bigger and better plant in Ohio. Food manufacturing is bigger than auto manufacturing and employs 200,000 Canadians so fixing our productivity gap is critical to stop jobs from going south. It also affects the farmers and suppliers.”

Q Should Canada peg the dollar to the US to stop these problems?
A “I’m not an economist and I’ve not talked to anybody, who understands economics, who thinks that’s a good idea. We cannot rely on a strategy of hope, or shift in policy, concerning the dollar. Our plan is a good news story because we have an opportunity to solve the currency problem. It’s not a plan of misery. This is clear, simple, achievable and affordable.”

Q I know I’ve asked before but will Maple Leaf Foods and McCain Foods merge some day?
A “Never.”

Is Maple Leaf In For A Fight?

From Boyd Erman at Globe & Mail: Did Maple Leaf do enough to avoid a fight?

Maple Leaf Foods Inc. may have a fight on its hands.

The meat and bakery company’s new plan to improve its results looks a lot like the old plan to improve results. That’s unlikely to be enough to placate the activist shareholders at West Face Capital Inc., who took a big stake in Maple Leaf this summer.

The fact that Maple Leaf is largely sticking with its original plan to invest in its businesses to try to drive margins higher could be read as a direct challenge to West Face.

West Face head Greg Boland and his partners at the firm have been silent about their plans since acquiring the stake, but given that they weren’t satisfied with the company’s original direction, this seems unlikely to change that.

One of the issues that is believed to bother West Face is the level of capital spending at Maple Leaf. The new plan sticks to many of the capital projects underway, and adds a new meat facility.

“It’s unlikely they [West Face] are supportive of the Maple Leaf Foods plan given the level of capital investment required,” National Bank Financial analyst Jim Durran said in a note. Mr. Durran said he’s optimistic that the shares will continue to perform well, because either Maple Leaf shows results on its plan or West Face will start to agitate more vigorously for change.

“We expect to see continued improvement in investor sentiment as the market’s expectations for value-creation strengthen – whether this occurs through MFI’s long-term strategic plan or other value-creation activities initiated by West Face remains to be seen.”

Maple Leaf’s Plan to Boost Stock

MSN Money (PR Newswire): Maple Leaf’s new plan

TORONTO, Oct. 5 /PRNewswire-FirstCall/ – Maple Leaf Foods (MFI:TSX) today announced details of a comprehensive plan to significantly increase near and longer term shareholder value. The plan, which was unanimously approved by the Company’s Board of Directors at its annual strategy review, builds on a strategic direction previously approved by the Board in September 2009.

Maple Leaf expects the plan will deliver substantial earnings growth in each of the next five years. Specifically, the company expects its plan will increase EBITDA margin by more than 75% over the next four to five years – from a current level of 7% to 9.5% in 2012, and 12.5% in 2015.

The plan includes several initiatives that are expected to increase margins in the near term, of which several require little or no capital investment. Many of these near-term initiatives are well underway, including pricing and normalization of trade promotional activity, simplification of bakery and meat products formulation and manufacturing, early facility rationalization, and the implementation of an integrated SAP system that will provide a base to enhance business performance and further reduce administration and processing costs.

The plan also contemplates a series of plant consolidations, coupled with strategic capital investments in new manufacturing capacity and technology. This will include construction of two large scale facilities: a bakery in Hamilton, Ontario that is planned to be commissioned in mid-2011; and a new prepared meats facility, with construction planned to commence in 2012. These investments are expected to materially increase the profitability and competitiveness of Maple Leaf’s manufacturing facilities and its distribution network.

“Maple Leaf Foods has a clear and achievable plan to deliver significant earnings growth now and through the next five years, yielding a very substantial return to shareholders,” said Michael H. McCain, President and CEO. “The primary driver of this earnings growth will be increased efficiency throughout our manufacturing network, which represents the largest portion of our total cost structure. We expect to achieve this by reducing complexity, consolidating plants and investing in scale and technology. We intend to finance these initiatives through internal cash flow and debt capacity without issuing equity, while maintaining an investment grade balance sheet throughout the process.”

    Protein & Bakery EBITDA Targets
    -------------------------------

The plan provides for continued improvement in EBITDA margins and return on assets throughout the period from 2010 to 2015. Management has benchmarked its facilities to best in class operations in North America, and intends to deliver returns that will achieve sales margins consistent with large branded consumer packaged food peers in the United States. Implementation of the plan is expected to achieve annual earnings improvements and deliver EBITDA margins of 12.5% by 2015 as follows:

                    Protein        Bakery

    Current            6.2%          9.2%

    2012               8.5%         11.5%

    2015              12.5%         12.5%

The significant increase in earnings accruing from the plan will result in returns on assets employed well in excess of the Company’s weighted average cost of capital. Management is confident it will achieve these targets, with the majority of these gains coming from well-defined cost reductions.

“Maple Leaf is committed to creating significant and lasting shareholder value,” concluded Mr. McCain.

Commited to creating significant and lasting shareholder value.

I’ve been offering a way to deliver EBITDA margin increases for the last 18 months within the Fresh Bakery Division (representing a large portion of Maple Leaf’s portfolio).

When does management realize that Franchisees and the National Bread Network will create significant and lasting value for Maple Leaf Shareholders? 

McCain’s Pay Keeps Pace

From David Milstead at the Globe and Mail: As Maple Leaf lags, CEO’s pay keeps pace with the giants

Excerpts:

Michael McCain, CEO of Maple Leaf Foods Inc., has no peers among Canadian CEOs.

If you don’t believe me, check the company’s proxy circular, which shows the firm used only U.S. food companies – many of them international giants – for comparison in setting Mr. McCain’s pay package.

……….

So what if we redefine the peer group? What if we say the comparison should be to Canadian companies in the consumer staples and consumer discretionary sectors?

The results are not good for Mr. McCain. The two companies closest in annual revenue are Rona Corp., where CEO Robert Dutton made an average of $2.7-million (Canadian) over the last three years, and Sears Canada, where Dene Rogers averaged $2.3-million in 2008 and 2009.

Maple Leaf spokeswoman Lynda Kuhn says the company uses U.S. peers because Canada doesn’t have a large number of food companies. She notes the company’s outside compensation consultant also signed off on the methodology. “We see the talent market as North American in scope,” she added.

……….

Maple Leaf’s share-grant plan allows executives to keep half the performance shares no matter how poorly the company does.

The unfortunate result for Maple Leaf shareholders is that while Mr. McCain’s pay package is keeping pace with the industry’s giants, Maple Leaf’s performance is not. The company’s board might examine whether the two should be better linked.

Does the US comparison work for the rest of us too?

Longos’ Growth

From Hollie Shaw, Financial Post: The taste of success

The key to running a strong family grocery business, Anthony Longo says, is to nurture strong relationships with everyone you touch: from customers and staff to the bank and the farmers you deal with. That’s a philoshophy embraced by the president and chief executive of the Missisauga, Ont.-based grocery chain, which defied industry odds to embark on an expansion amid the recession. In 1956, his father, Joe, opened a single store with and his brothers Tommy and Gus. Today, Longos is a thriving Toronto-area business that will open its 23rd location on Oct. 6. Financial Post’s Hollie Shaw spoke with Mr. Longo about his philosophy.

Q How did you come to love the family business?

A I always loved going to Ontario food terminal with my father to see the product that had just been picked: lettuce, strawberries, six-quart baskets of peaches … and we are fortunate to still have the same relationships with the same farmers, some of them the second or third generation. I grew up in the stores.

Q How did your responsibilities increase over time?

A I worked part-time forever, and I then went to Humber and studied business administration. In 1982, I joined full-time. We had three stores at the time. Grocery, dairy and deli were the areas I had responsibility for. I began automating the payroll. I bought the first PC [computer] in 1985 and we really put the infrastructure in place during those first 10 years. Before then, we were buying [big-brand items] through a wholesaler. We went from that to buying directly from manufacturers–Kraft, General Mills and Kellogg. We needed to be able to compete to lower our costs; most of our purchases are direct today. We are also part of nationwide buying group United Grocers Inc. For us, what is important is building relationships so that we are being treated equitably in the market; it doesn’t help consumers or manufacturers if businesses like us aren’t around to keep the big guys honest.

Q What are the benefits to having a family-run business? Any interest in taking it public one day?

A The company keeps costs down because it is family-run; [it also] cuts out a lot of head office costs. Our competitors have a certain amount of cost associated with being public, and they have to meet the expectations of the Street. We can decide to take lower profits for a time if we need to, or to [put money into the business] for the long term. We don’t believe we need to go public. We have had a 54-year relationship with the same bank [CIBC], and it’s a very strong one.

Q What is your sense of where the grocery market in Canada is going in the next few months? Has deflation taken as much of a toll on Longo’s as it did on other retailers? A Our internal food-price deflation was 1.6% in the quarter ending in May–so [the effect] is real. We see some inflation coming in the fall with flat to slight inflation in food. I think the Canadian dollar started to have an impact on pricing last September so that will lap the year since that began.

Franchise Agreements Key To Success

From the National Post: Franchise agreements key to success

Derek Sankey, Financial Post · Monday, Sept. 27, 2010

When it comes to the business of franchising, the stakes are always high. Franchisors want to protect their brands and ensure smooth expansion; franchisees need a solid system to build a business on. But when things go awry for whatever reason, the consequences can be enormous.

There are plenty of examples of legal wrangling in the world of franchising, including the the much-publicized battle Tim Hortons has found itself embroiled in. Some of its franchisees have proposed a $1.95-billion class-action lawsuit, claiming the company is charging puffed-up prices for the frozen and reheated treats Tims serves. A hearing is scheduled for November to determine whether the suit can proceed.

And there are plenty more examples. Earlier this year, the Ontario Court of Appeal sided with hundreds of franchisees of Quiznos Canada by ruling their class-action lawsuit could proceed. The group alleges the franchisor and others illegally conspired to enhance and fix the prices of supplies used by franchisees in their businesses. In July, the same court ruled that franchisees of Midas Canada could not be forced to waive or release their rights to participate in class-action lawsuits to sell or renew their franchise agreements.

Regardless of the outcomes, these are the kind of situations that can get messy — fast. And corporate franchise lawyer Joseph Adler, a partner with Toronto-based Hoffer Adler LLP, warns “class-action [lawsuits] are on the rise.

“[Franchisees] gang up together and they create a much more liable threat to the franchisor,” he says.

Avoiding such threats starts with drafting a good franchise agreement. These agreements are the cornerstone of the relationships between franchisors and franchisees. “The franchise agreement is central — absolutely core — to the relationship,” says Lorraine Mc-Laughlin, president and chief executive of the Canadian Franchise Association. “I can’t underscore how important it is to take a franchise agreement to a lawyer … who specializes in it.”

While the aforementioned cases don’t necessarily have anything to do with the quality of the franchise agreement, there’s no question such agreements guide the relationship between the parties. Nor does a lawsuit necessarily indicate a bad franchise system, Ms. McLaughlin says.

There are plenty of reasons these disputes can end up in court — a franchisee who consistently fails to meet quality standards or volume targets, for example — but the point is not to end up there in the first place. “It takes essential energy that needs to be spent on building the system and diverts it to something that’s negative, costly,” Mr. Adler says. “It will eat you up.”

Michael Bateman, president and chief executive of Grade Learning, a chain of learning centres in Ontario, does his due diligence to ensure he never ends up in court, and so far it’s worked. He spent weeks in consultation with lawyers and stakeholders to ensure his franchise agreement was up to snuff.

“If you start with common sense and deliver on what you say, then it’s fairly simple,” he says.

“It’s when things are left and the communication is not flowing properly that things can go astray.

“It’s almost like a marriage. If everybody understands what the expectations are … then really the agreement isn’t something that’s looked at again.”

For every franchise relationship, two key documents should be drawn up and maintained: The franchise agreement, which lays out the terms of the relationship between franchisor and franchisee, including expectations of both parties; and the disclosure document, which lists mainly the financial information about the inner workings of the company.

Together, these documents help protect the company brand, set clear expectations, provide an accurate snapshot of the company’s financial health, lay out the type of franchising model (single unit, multiple unit, area development or master agreement), exit strategies, additional fees and other critical factors in the relationship.

In 1993, when Grade Learning was founded, Mr. Batement immediately put an agreement in place because he planned on franchising from the start. In 2000, he revamped the disclosure document and continually updates it. This year, it underwent another overhaul because of changes to laws and other factors.

“The disclosure document is more of a living, breathing thing that can change on a quarterly basis,” he says.

“As laws change or as situations occur where there was some learning, you change them over time. You want to make sure that people are clear as to what the opportunity is and the company’s objectives.”

Alberta, Ontario and Prince Edward Island have enacted legislation governing franchising, while New Brunswick is expected to do so early next year, and Manitoba expects to have laws in place in about a year, Ms. McLaughlin says, noting CFA members, whatever province they operate in, are required to have franchise agreements and disclosure documents available.

Both sides in the relationship need to have someone who specializes in franchise law review the documents before signing anything, she recommends. Ideally, it helps set the tone for a positive relationship.