Hog outlook: Industry crisis may spur decline

(Resource News International) — The Canadian hog industry may lose some of its
best producers if the crisis now facing the industry
continues, according to Clare Schlegel, president of the
Canadian Pork Council (CPC) in Ottawa.

In two to three years’ time, Schlegel said, he anticipates
the Canadian hog industry will have declined. The CPC is worried some of the country’s best hog producers
will be forced to shut their operations due to financial
crisis.

“It is not only small producers who will be pushed out,”
said Schlegel, who farms at Tavistock, Ont., southwest of Kitchener. “All producers are thinking through their options
right now and our fear is that the best producers may choose
to exit the industry and that would be rather unfortunate.”

According to Statistics Canada, Canadian hog producers
reported 14.4 million hogs on their farms as of Oct. 1,
2007. This was down 1.7 per cent from the second quarter of
2007, and 3.1 per cent below the same date last year.

While there are a number of factors contributing to the
current financial crisis, Schlegel said he believes none has played as
big of a role as the surging Canadian dollar, which at its
peak rose to US$1.104 in November, the strongest level since
the central bank floated the currency in 1950.

“Most of our prices
are based on a formula derived from the Iowa price. So
whatever the U.S. price is, packers adjust it for the basis,
which is typically the cost of transportation, plus they’ll
adjust for the exchange rate,” said Brad Marceniuk, a livestock economist with
Saskatchewan Agriculture in Saskatoon.

“Our prices in Canada to begin with are typically C$10
per hog less than in the U.S., but what has happened in the last
year is that we’ve seen a 20 per cent rise in the Canadian
dollar. Automatically our prices go down 20 per cent
whereas for the U.S., because hogs all priced in U.S. dollars,
they’re not affected,” he said.

Also losing

As Schlegel pointed out, the Australian and European hog
industries are also suffering as a result of a weaker U.S.
dollar.

“The U.S. pig farmer is also losing money but only about
half as much as we are. If you are exporting pork to Japan,
10 yen now buys more pork in the U.S. than it used to. If
Canadian exporters want to continue to sell pork to Japan then
they have to come down to meet the U.S. price,” Schlegel said.

High feed costs are another factor weighing heavily on
the beleaguered industry. According to the CPC, feed
represents more than 70 per cent of pork production costs.

The reason for the recent increase in price is the
biofuel industry, which requires feed grains for the
production of ethanol. As a result of the increased demand,
price have risen substantially.

“Feed costs are C$25 per pig more than what we would
normally expect and that is due to government policy regarding
ethanol,” Schlegel said.

Another factor to watch in terms
of its effect on prices over the next few quarters, according to Marceniuk, will be
slaughter capacity in the U.S. According to
Marceniuk, U.S. slaughter numbers for the week ending Dec. 8
increased 12.6 per cent from the same period last year.

“There is only so much slaughter capacity in the U.S. and
that does not change overnight. Once you get to a certain
point, there are more hogs to slaughter than there is capacity
and that has a big effect on price,” he explained.

The U.S. weekly slaughter for the last four weeks amounted
to 2.294 million head, an increase of 9.4 per cent over the
same period one year ago.

Canadian slaughter and processing capacity also affects
hog producers. Pork processor Maple Leaf Foods, for example,
recently closed plants in Saskatoon and
Winnipeg. Its plant at Brandon, Man., introduced a second
shift, however, to replace the capacity lost by the plant
closures.

While Canadian slaughter capacity has not
seriously been affected by the plant closures, transportation costs have risen, according to Mark Ferguson, a policy analyst in Saskatoon with the Saskatchewan pork producers’ group Sask Pork.

“For Saskatchewan, the plant closure in Saskatoon means
half of our production, which used to go to our plant, now has
to travel a lot further, whether it’s to Brandon or down into
the U.S., and that means higher transportation costs. On average,
we’re estimating our producers paying about C$5 more per
hog to transport them to Brandon. If it’s going to the U.S. it’s
going to be significantly higher,” he said.

Higher transportation costs could also mean a decline in
the number of slaughter weight pigs in Canada.

“Because slaughter capacity has gone down, if we’re
shipping a slaughter-weight hog to the U.S. from Saskatchewan, it
would be C$20 per hog or more, whereas if you ship a small
pig it’s only C$2.50 per hog. It makes more sense
economically,” Marceniuk said.

Program cash

In an effort to address the financial crisis currently
facing many hog producers, on Dec. 14 the Canadian
government announced livestock producers will have access
to $2.3 billion in loans and $1.5 billion in cash payments
starting early in the new year.

But both Ferguson and Schlegel said they have some
serious reservations regarding the government’s financial aid
plan. Due to program caps and loan
requirements, Ferguson said, the enhanced program only stands to benefit a
small portion of Canadian hog producers.

“A lot of small producers will find it useful,” he said,
“but as for the entire industry, I’d say a high percentage of
production is basically excluded from this program.”

Schlegel said he thinks the program as announced demonstrates that the Canadian government does not really understand how dire the situation is for most hog producers.

“You can’t sustain this,” Schlegel said. “This is
truly an epic crisis of financial ruin.”

Marceniuk said an interesting factor to watch for in 2008
will be U.S. pork exports to China. China recently lost a large
portion of its pig herd to disease. Furthermore, it was
recently announced that U.S. plants are being reinstated to
ship pork to China.

“If we were to see some big exports from the U.S. into
China in the new year that would help prices increase again.”

According to Marceniuk, year-to-date ending Dec. 1,
combined Canadian hog slaughter and total live hog exports to
the U.S. totalled 28.383 million head, up nearly 1.4 per cent
from 27.999 million head at the same time in 2006.

On Dec. 18 this year, the Manitoba Index 100 equivalent
hog price (FOB Iowa plant) was C$46.91/cwt or C$103.43/100 kg.
That compares with the Dec. 18, 2006 equivalent price of
C$56.46/cwt or C$124.46/100 kg.