While much has been written about the structural changes that have occurred in the U.S. swine industry, a more subtle, yet dramatic, shift is underway that will have major implications for price and international trade in coming years. This shift is the increasing reliance of U.S. producers on segregated early weaning (SEW) and feeder pigs born in Canada.
To understand this shift, one must first examine the ongoing changes in the U.S. industry. With the advent of two- and three-site production systems, farrowing is increasingly separated from nursery and finishing sites.
In 1988, Iowa had 25% of the U.S. breeding herd and 26% of market hog inventory, as reported in the March 1 USDA Hogs and Pigs report. In the March 1, 2002 report, Iowa producers had only 18% of the breeding inventory, but still held 27% of the market hog inventory. Beginning in 1997, Iowa producers reinvested in nursery and finishing facilities at a much higher relative rate than in breeding and gestation facilities.
Where do the pigs for these nursery and finishing facilities come from? While neighboring states such as Missouri, Minnesota, Illinois and Nebraska remain significant sources of SEW and feeder pigs (Table 1), a relatively new source of pigs for finishing facilities comes from Canada.
The influx of Canadian-born SEW pigs and feeder pigs is increasing (Figure 1). In 1999, 1.94 million pigs weighing 110 lb. or less crossed the border, an average of 37,000 weekly. In 2001, the number climbed to 3.14 million, averaging 60,000/week.
In the first 3 months of 2002, the average increased to over 73,000/week. To understand the magnitude of this increase, there were only six weeks in 2001 that had 73,000 or more feeder pigs cross the border.
If the rate of increase in imports noted for 2000 and 2001 is maintained in 2002, U.S. producers will import 4.1 to 4.4 million feeder pigs this year. If the first-quarter 2002 rates continue, it is quite possible that total feeder pig imports from Canada could approach 5 million pigs this year.
There are several reasons more pigs are being imported from Canada. A primary reason is demand. As the U.S. industry evolves, new farrowing facilities are only being built when all of the pigs from the facility have a home.
And, when traditional farrow-to-finish producers stop farrowing, they often continue to use their nursery and finishing facilities. Unless they invest in a farrowing facility to provide pigs, they must look to the open market, which is increasingly Canadian-born pigs.
The second reason for the influx of Canadian pigs is the strong American dollar relative to Canadian currency. Canadian producers want to sell pigs to U.S. producers because of the favorable exchange rate. Often, U.S. buyers are able to purchase Canadian-born pigs delivered at a price equal to, or lower than, local pig prices. This exchange-rate phenomena is not unique to the swine industry. Many U.S. manufacturing industries face similar price differentials which make it cheaper to manufacture a product in Canada and ship it south.
Points of Origin, Destination
Where are the Canadian pigs coming from? According to USDA-APHIS (Animal and Plant Health Inspection Service) statistics on border crossings, 62% of the feeder pigs coming into the U.S. in January-March 2002 originated in Manitoba and Saskatchewan. Another 36% crossed the border at Ontario checkpoints.
In 2000, Iowa was the major destination for the western province pigs. Minnesota ranked second and Nebraska was third. No data was found to indicate where the Ontario pigs were bound, but Indiana, Illinois, Michigan and Ohio are predictable destinations.
Officially, live hog exports from Canada to the U.S. totaled 5.18 million head in 2001, comprised of 2.03 million slaughter hogs and 3.15 million SEW/feeder pigs. Manitoba and Ontario supplied the majority, totalling 1.72 million and 1.21 million head, respectively. Manitoba and Alberta supplied the majority of slaughter hogs with 856,169 and 575,445, respectively. Projections are for 5.8 million Canadian hog imports for 2002.
Other than 1998, when a strike at Maple Leaf Foods in Burlington, Ontario temporarily increased the flow of slaughter pigs to the U.S., slaughter pig imports have remained relatively stable at approximately two million pigs annually or roughly 38,500/week (Figure 2). Because this number stays relatively stable, it can be factored into our slaughter capacity in a reasonably orderly manner.
The steady growth in imported feeder pigs, year after year, is more disruptive to the U.S. system (Figure 3). While the increase in imported feeder pigs may level off in the future, at the present time it appears to be continuing unabated.
The December 2001 Quarterly U.S. Hogs and Pigs report indicated an industry inventory 1% below the December 2000 report. This news and subsequent developments led the Chicago Mercantile Exchange (CME) June Lean Hog Carcass Contract to a high of $68.20 during February 2002. However, since that date, the increases in feeder pigs entering the U.S. and the continuing increases in productivity in the U.S. herd, coupled with struggling retail demand, have dropped the market dramatically.
What About Mexico?
The U.S./Canadian/Mexican hog production, marketing and consumption system needs to be viewed much more as a whole. While the U.S. dominates the total numbers in all areas of the system, we have a very inelastic product system.
For example, during March we produced about 1.5% more pork product than the same period in 2001. We also witnessed a 25% price decline from the previous period. Very small changes in total product volume have large impact on prices.
Further out, this pattern creates a distinct problem for producers in the fall and early winter of 2002. Increases in production and imports, continued at the rates indicated, would surely tax pork packer capacity. Even if increases level off, total hog numbers will still be near packer capacity for several weeks and the entire system will be very fragile. Uneven or irregular live hog deliveries, or any disruption of smooth operations at any pork plant in the U.S. or Canada, would likely disrupt market prices.
The long-range market, as of March 29, clearly shows a potential for the December CME Lean Hog Carcass Contract to close in the $40-42/cwt. range — a live-hog price equivalent near $30/cwt. When December CME Lean Hog Contracts crossed the up-trend line created by the December 1998 low and the December 2001 low, a target became the $42 range for December to close.
The March Hogs and Pigs report added nothing to improve the situation. In the best case scenario, with production leveling off, we will still be very close to pork packer capacity this fall. We expect packer capacity to be operating at 96 to 97% for 8-11 weeks this fall.