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> f CANADA PACKERS LIMITED REPORT TO SHAREHOLDERS FOREWORD In it..:- Report, at various stages, four time periods are used: 1. Calendar Year j. Fiscal Year of the Company; 62 weeks. Ending: last Tlmmday in March. Designated by year of close, e.g. Year undr. review is Fiscal Year 1942. f. Crop Year or Production Year. Beginning month of fjusli production, e.g. Klusli production of Hogs begins in Sep- tember. Therefore, ilu- Hog Crop Year ia from September to following August. Designated also by year of close. Hog Crop Year 1'942 is year from September, 1941, to August, 1942. 4, War Year The war began September, 1989. First War Year September, 1939, to August, 1940. Second War Year September, 1940, to August, 1941. Third War Year September, 1941, to August, 1942. Note 'War Year* is therefore co-terminous with Hog Crop Year. 1 The fifteenth year of Canada Packers Limited closed March 2t'.tl 1942. It was the second fiscal year which lay completely within the war period. Throughout the year, both volume, and the nature of operations were determined almost wholly by war conditions. Volume reached a new record level, viz 1,228,029,942 Ibs. Average per week 23.6 million Ibs. Previous high: fiscal year 1941 1,091,263,362 Ibs. Increase 12.5% Dollar sales reached (relatively) a still higher new level. They were $144,509,292.41 Average per week $2,780,000.00. Previous high: fiscal year 1941 $110,291,839.97 Increase ~ 31.8% The higher percentage increase in dollar sales, _ 31.8% M compared with the increase in pounds sold, .... 12.6%, reflects the substantial advance in prices which occurred within the year. This advance would have been greater, had it not been checked in December, 1941, by the imposition of price ceilings. The heavy increase in volume was due almost entirely to war demand (military camps at home plus shipments abroad). Civilian consumption, especially of pork product, was curtailed in order that ore might be available for Great Britain. *** Net Profit, (after Bond Interest, Depreciation and Taxes), was _ $1,611,464.91 Equivalent, On Sales $144,509,000, to _.._ 1.1% On Tonnage 1,228,000,000 Ibs., to 13. Ic per 100 Ibs. The regular dividend of $4.00 per share ($1.00 quarterly) wat, paid throughout the year. The impact of war conditions upon the Company's operations IB further indicated by the following tables abstracted from the State- vents of the last four fiscal years. The earliest of these years (ended March, 1939) was the last complete pre-war year. TABLE 1 Tonnage Sales Profit Profit % of per Sales 100 Ibs. 800,763,592 $ 77,225,732 $1,238,736 1.6% 15.5c 913,261,116 88,205,639 1,667,809 1.9% 18. 2c 1,091,263,352 110,291,839 1,666,028 1.4% 14. 4c 1,228,029,942 144,490,489 1,611,465 1.1% 13. Ic In other words: in the third War Year, as compared to the last pre-war year: Tonnage increased from 800,000,000 Ibs. to 1,228,000,000 Ibs. 63 <;' Sales increased from $77,000,000 to $144,000,000 87% Sale price-per-pound of product increased from 9.6c per Ib. to 11. 7c per Ib 22% Table 2 is a selection of the main data from the Balance Sheets cf the same four years. TABLE 2 Fiscal Year ended March 1940 1941 1942 (000 omitted) $ 3,423 7,682 12,116 21,636 $ 5,340 10,947 17,369 21,818 $ 7,131 10,384 18,698 21,745 $10,279 16,339 28,101 22,694 $ 3,780 $ 7,166 $ 7,027 $14,167 5,436 9,981 10,847 20,216 Arl> Accounts Receivable Inventories Total Current Assets Fixed Assets Liabilities Loans from Banks Total Current Liabilities Working Capital (Current AsseU less Current Liabilities) $ 6,6M) $ 7,378 $ 7,751 $ 7,885 In this case the comparison between the last (ire-war year (Fiscal 1939) and the year under review (Fiscal 1942) is a very striking ne Accounts Receivable have advanced from $3,423,000 to $10,279,000 Inventories from 7,682,000 to 16,339,000 Hank Loans from 3,780,000 to 14,167,000 The heavy increase in Bank Loans is the 'reflex' of the increased receivable!) plus inventories. This increase is due chiefly to sales to the Dominion Government for war consumption. As at March 26th, 1942, the value of meats in process for, plus sums due from, the Dominion Government totalled 16,018,929.32, To this there is no corresponding item in the Balance Sheet of 1939. The following analysis of the 'Sales Dollar' tells the story of the ku-:v in 'skeleton' form, and a comparison of the analysis for the last four years reveals, from another angle, the impact of the war pon the operations of the Company. TABLE 3 Analysis of Profit & Loss- Yeor* ended March 1939 1941 1942 gales ... $77,226,732 $88,205,639 $110,291,839 $144,609,292 Con of products, chiefly Live Stock 80.6% Cost of ma- terials and packages .. 2.6 Wages and salaries .... 8.9 General Kxpcnses .. 4.4 Wartime In- vcntory Reserve .... Depreciation 1.1 Bond Interest .2 79.1% 2.8 8.8 4.3 4 80.7% 3.0 8.1 4.1 81.4% 3.0 7.3 8.8 Total cost of product, plus expen- ses Written-off Investments Profit before taxes Taxes 97.7 2.3 .7 Net Profit ..- 1.6 97.1 .1 2.8 1.4 7.0 1.0 1.1 Comment regarding items: Cot of Producu. This is the Producer's share of the Sales Dollar. The increase is from 80.5 per cent, in the last pre-war year to 81.4 per cent., the highest in the history of the Company. Materials. The advance in this item, from 2.6% to 3%, is due chiefly to war demand for certain products (mostly tinned meats) in which container cost is high. Wgei and Salaries. These declined from 8.9 per cent, to 7.3 per cent. The decline does not reflect a decrease in wage rates (which have increased somewhat), but rather the advance in price-per-pound of products. Expressed as cost per 100 Ibs. of foods processed, wages and salaries in the four years were as follows: 1939 85 cents per 100 Ibs. 1940 84 " " 1941 81 " " " 1942 : 86 " " " " The increase from Fiscal 1941 to Fiscal 1942 (i.e. from 81c to 86c) is due chiefly to the cost-of-living bonus introduced, by stages, within the year. Sundry Expenses. The decline (from 4.4 per cent, to 3.8 per cent.) ie likewise due to advance in price-per-pound of products sold. Wartime Inventory Reserve. The extra 'profits of wartime derive from increasing volume and advancing prices. It is the policy of the Government to appropriate the largest feasible share of these profits, in the fonn of taxes. No one questions the justice or the necessity of this policy. However, the Government recognizes that at some stage fol- lowing the war, the conditions of the war years are likely to be re- versed. Volume will decline and prices will fall. Such a recession will involve losses commensurate with extra wartime profits. But whereas, on the advance, the Government takes nearly all the profits; the losses of the decline must be borne en- tirely by the industry. As a partial buffer against these post-war losses, a 'wartime inventory reserve" is permitted. This reserve, however, is limited in scope. It may be set up only in respect of a volume equivalent to that of the last pre-war year: (in the case of this Company, Fiscal 1939). Also, the reserve can be set up only after the full minimum tax (40%) has been paid. Depreciation. This is an 'overhead* charge. The sum is practically constant. The decline in precentoge is in inverse ratio to the increase in volume. Bond Interest. Outstanding Bonds in 1939 were $3,750,000. Outstanding Bonds in 1942 were $1,500,000. Taxes Net Profit* Most of the material in the following table has already appeared in this Report. Nevertheless, it is worth while to set up separately for the four years the comparison of taxes and profits. TABLE 4 Comparison Income & Excess Profits Taxes and Net Profits Taxes % of Sales Net Profits % of Sales Fiscal 1939 $ 320,200 .4% $1,238,736 1.6% 1940 916,284 1.1% 1,667,809 1.9% 1941 1,325,000 1.2% 1,555,028 1.4% 1942 2,422,862 1.7% 1.611,465 1.1% The 'Taxes' column reflects the advancing tax rates of the war years. The 'Net Profits' are, of course, subject to further taxation. Net profits get into the hands of Shareholders only when distributed as dividends. When so distributed, they are subject to Personal Income Tax. The average rate of Tax would be not less than 50 per cent. So, the final story of the Fiscal 1942 operations would be that the Government receive as taxes, approximately $3,200.000, and the Shareholders as net income $ 800,000. In that respect, Shareholders may reasonably feel they arc mak- ing a useful contribution to the war. MILLION AND HALF MORE HOGS REQUIRED But the measure of the Company's contribution to the war effort, is not chiefly in terms of taxes. The production, processing and distribution of food is one of the most vital phases of the war effort. On the North American Continent where, for ten years, the chief perplexity has arisen from a 'surplus' of food, it is now being realized that a period of shortage may be ahead. The primary problem is that of 'production.' This rests in the hands of the Farmer. Canadian Farmers, with reduced manpower, have already achieved an all-time record. In the production effort, however, the Packi ig Industry has a role to play, second only to that of the Farmer. The processing of the live stock, the utilization of every portion, and the prevention of spoilage, are matters of first national importance. The Industry can fairly claim to have measured up to its job. The enormously increased deliveries of live stock have been processed without a single 'block.' The necessary plant extensions have been made without appeal for Government funds. And, considering the heavy labour turnover, caused by war conditions, efficiency has been well maintained. Evidence of this is found in the fact that out of the 'Sales Dollar' the percentage paid to the Producer is the highest on record. Above all, the Packing Industry has been the indispensable instrument through which the various Government controls affecting meats have been worked out. Of these, the two most important have been : (a) The Canadian Bacon Board, which controls production and shipment of Wiltshire Bacon to Britain. (b) The Wartime Prices and Trade Board, which hns invoked the aid of the Packing Industry in establishing ceiling prices for meats. No doubt Government Boards have had similar assistance from many other industries. However, the problems in establishing ceil- ings for meal have been of the most intricate and difficult kind. In the framing of the regulations, the Board has called for the co-opera- tion of large groups of senior officers from the Packing Companies, for long periods of time. This is mentioned, not because assistance was grudgingly given, but as a proof of the indispensable role of the Industry in the economy of the Dominion, and particularly in the broad Live Stock field, within which the Packing House is the mar- keting instrument. *** To the Live Stock Industry in its broad sense, references have already been made in this Report. They have had to do chiefly with increased production. The increased production has sprung from war demand. It is, therefore, interesting to examine it in periods of 'war years.' These, as explained in the foreword, correspond with crop years. Table 5 gives the record of food animals processed in inspected establishments, in the last four crop years. TABLE 5 Slaughterings at Inspected Establishments Total Canada Crop Year Sept. 1 to Aug. 31 Cattle 1939 854,963 1940 (War Year 1) .. 887,312 1941 ( " " 2) .. 940,795 1942 ( " " 8)* 1,021,496* Increase from crop year 1939 to crop year 1942 166,543 19% 'August estimated. / The outstanding increase is in Hog production. This reflects the fact that (in respect of meats) Canada's war job has been to keep Britain supplied with Wiltshire Bacon. Total shipments of Bacon for the same four years have been: Calves 674,963 690,706 696,948 717,940* 42,977 6% Sheep 793,724 758,428 794,688 820,841* 27,117 3% Swine 3,186,740 4,601,845 6,172,982 fi,50fi,000* 3.319,260 104% 160,986,100 ll>s. 291,131,600 Ibs. 443,288,000 Ibs. 536,702,000 Ibs. Crop year 1939 14 " 1940 (1st war year) .. " 1941 (2nd " " ) " 1942 (3rd " "I* 'August estimated. Kach year since the war began, the Canadian (iownuient has contracted with the British Ministry (if Food tn deliver a specified quantity of Bacon, in regular weekly shipments. To implement tiuv e. contracts the Canadian Bacon Hoard was set up. Contract 1 wag for 60,000 Cwts. weekly price SIS. 02 f.a.s. Atlantic Seaboard. Contract 2 was for 70,000 Cwts. weekly price 15.82 f.a.s. Atlantic Seaboard. Contract 3 was for 103,000 Cwts. weekly price 19.77 f.a.s. Atlanti* Seaboard. On Contract 1 and Contract 2, shipments exceeded the contracted quantity. On Contract 3, with one month to go, it now appears that shipments will fall short of the contracted quantity more than 60 million pounds. And this in spite of the fact that Canadian con- sumption of pork product has been drastically cut down (to make more available for export). The reason dates back to Contract 2. The reduction in pric* (from 18.02 f.a.s. to 15.82 f.a.s.) was a mistake. Many Farmers, especially in Eastern Canada, felt they could not produce hogs at this price, and consequently marketed their sows. When the con- tract had run only six months (i.e. in May, 1941) the mistake wa recognized and the price advanced. Note: The reduced price or Contract 2 applied equally to bacun from Western Canada, and it muy be asked why It did not also dlHcourage production (here. The answer lies in Geography, it takes fi pounds of grain to produce 1 pound of Wiltshire bacon. By converting the cram to bacon, a very important wavintr in freight is effected. Because of the longer haul, this saving is relatively greater In respect of bacon shipped from the West. Therefore, a price which involves a loss to the Eastern Pig producer may still leave a margin of profit to the Western Producer. In Western Canada, production in crop year 19<2 increased 7U,UOO hogs. It the price of Contract 2 had been a wise one, the Increase might have been twice that number. But whereas a Farmer can get out of production in a day, (by liquidating his sows) ; to get back into production requires at least a year. First, new sows of suitable type must be secured. This takes time. After the sows are bred, until the litter is marketed, a further period is involved of approximately ten months. How serious was this check to production in Ontario and Quebec, is revealed in the following table of hog marketings. TABLE 6 Crop Year Hoc Marketing* in Canada Eastern Canada Western Canada Total 1939 1,961,994 1,268,397 3,230,391 1940 .. 2,458,183 2,179,175 4,637,358 1941 "" 2,920,289 3,160,592 6,080,881 1942 (August estimated) 2,683,018 3,884,127 6,567,145 In the first two war years, hog marketings in Eastern Canada increased approximately 500,000 hogs caclr year. In War Year 3, as a result of liquidation following the announcement 01 Contract 2, marketings declined approximately 250,000. ****** For the coming crop year, Britain has appealed for 700 million. pounds of Wiltshire Bacon. This is 100 million pounds more than the quantity of Contract 8, and 160 million pounds more than deliveries under Contract 3. To provide the extra quantity requested by Britain in the com* ing year will itself require an increase in production of 1,500,000 But still more hogs are asked for. Because of the developing shortages of other important foods, it would be extremely helpful, if Canadians were able to have as much pork product as they de- sired. To make this possible, at least a further 1,500,000 hogs would need to be produced. It is likely, then, that the Government will appeal to the Cana- dian Farmers to produce, in the coming crop year, 3 million hogs more than were produced in the present crop year. In one important respect, the appeal will come t a favourable time. Hog production depends upon feed. And Canada seems about to harvest one of tke heaviest crops in its history. But hog production also takes labour. And the Farmer is already hard pressed. Moreover, he is being urged, at the same time, to increase production in many other lines. Undoubtedly the Farmer will do his best. And more food in total will be produced. But what form the increased production will take, will depend upon two factors. 1. Plant considerations. Other things being equal, he will ex- tend production in branches of live stock for which he has existing facilities. 2. Profit. He will naturally favour that form of production which will yield him the highest return. Both these considerations will probably operate in favour of in- creasing hog production. ,* If the production called for is realized, the increase must come chiefly from Western Canada. Table 6 reveals that leadership in hog production has already passed to that area. This fact lends weight to the importance of a much-needed effort; namely a campaign towards hog improvement. The vast areas of the West and the varied racial origins of the producers, add greatly to the difficulties of such a campaign. Nevertheless, the issua of hog improvement is one of the most important single factors in the outlook for Canadian Agriculture. At the end of the war, the welfare, it might almost be said the existence, of the Canadian Hog Industry depends upon one factor: whether at that time Cana- dian bacon is equal in every respect to the best Wiltshire Bacon pro- duced elsewhere. Canada is already producing on a scale which involves a surplus (over domestic requirements) of at least 4 million hogs per year. That is equivalent to 80,000 hogs per week. At the end of the war, the surplus will likely be much greater. Unless, at that time, the British market can be held for this quantity of product, Canadian pig producers will face a crisis, which might well develop into a catastrophe. Before the war, Britain's total purchases of Bacon from Abroad were (the product of) 137,000 hogs weekly. Of these imports, Can- ada's sh:tre in its record year was 33,000 hogs weekly. From Den- mark, Britain bought 65,000 hops weekly. After the war, Canada must ask Britain for a market for at least t>0,000 hogs weekly. To grant such a. request will involve a difficult modification of Britain's quota schedule. One thing is certain, Canada could not ask, and Britain couM not concede such a quota, unless Canadian Bacon were equal in quality to the best bacon procurable from other countries, In wartime, all the groups concerned in hog improvement. Pro- ducers. Government Officers, and Packers. are so busy with tha problems of filling w;ir orders that this paramount issue of quality tends to be overlooked. But hog improvement takes time. If Canadian bacon is to bo up to the necessary standard iif the end of the war, the job must be done during the war. A good deal Inix been done. But not enough. A senior Government Officer should be assigned to this special job Leadership must como from the Government. For final authority rests there. Willing co-operation will come from the other group* involved. * * * * * * Mention hns already been made of the wide extension of Gov, eminent control made necessary by war conditions. Prices of all animal products, especially cattle, hojis, cheese, butter, powdered milk, poultry, egK'S. are determined by Government action to an extent never before thought of. In the domestic field, ceiling prices have been set. As to ex- ports, not only are prices determined i>y Government contracts, but the actual assembly and shipment of product has been entirely taken over. These actions have been force,! by war conditions. In the carrying out of these controls, the highly centralize 1 Packing Industry has been a useful and co-operative instrument. Within the Industry, operations have been transformed. Under normal conditions the Packing Industry is pet haps the most keenly competitive of all Canadian industries. Competition to buy fr.nairiN as keen as ever. The Government hns provided for this by f\cludin live-stock prices from ceiling control. In the sale of meats, however, shortage of product has change I the nature of competition. It is now competition between retAilers to secure the product which is available. In the effort to siv;<iv their requirements, retailers commonly place their full orders v '.t!i two or more houses, feeling sure that even from the multiple orders, only a portion of their requirements will be shipped. Sonic products, for instance fresh pork cuts, have largely disappeared from tnc' shops. One of the most acute, and disconcerting shortages has leen that of beef in recent months. Space limitations permit only a baiv state- ment of the causes of this shortage. They were: 1. Owing to full employment, purchasing power was high. 2. 'Demand' wa< further increased by the heavy requirement* of military vamps. (Military requirement* have rtcciit'. been five million pounds monthly.) 3. A further increase in 'demand' was caused by the much-lesv than-normal supply of pork meats. 4. As against these extra 'demand' conditions, 'supply', durin? the \> inter and Spring months, was short. Fewer cattle than usual had gone into the feed lots. As events turned out, aj the feed-lot cattle could have been consumed in Canada* Instead of this, abnormally heavy shipments went to United States. As a lesult of tile above conditions, in May and Jure an acute shortage, of beet' developed. Many shops !': dav, on end were entirely without beef. (Continued on Next Page) '