Last week's Hog Statistics Report from Statistics Canada indicates that the Canadian pork production sector is indeed in the clutches of several economic problems, few of which appear to be of their own making.
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Canada's breeding herd on Oct. 1 was pegged at 1.62 million head, 20,000 head smaller than in July and 28,000 head (1.7%) smaller than one year ago. The decline leaves the combined Canada-U.S. herd 1% larger than one year ago on the strength of growth in the United States (see Figure 1).
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Perhaps the more surprising news in the report was the continued decline of productivity measures in Canada. July-September farrowings were estimated to be 857,000 litters, 4.5% smaller than one year ago. That makes the fourth consecutive quarterly decline in Canada's farrowings and every one of those negative figures have been significantly larger than the respective quarter's sow herd reduction. If one wants to argue that we should look at lagged sow herd figures, it gets even worse since the first of these negative farrowings quarters followed year-over-year increases in Canada's quarterly breeding herd.
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What is interesting is that farrowings are down by more than Canada's pig crop. I think that is a testament to the job Canadian producers are doing raising pigs, but the trend in year-over-year change in Canada's pig crops is certainly disturbing. The 3.4% year-over-year decline in Canada's pig crop means that the July-Sept. combined Canada-U.S. crop is smaller than that of 2005 -- the first time that has happened since the second quarter of 2003, when the roles of growth and expansion were reversed.
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Much of this, of course, is due to the devastating impact porcine circovirus-associated disease (PCVAD) has had on Canada's herd, especially in the east. While still a fight, producers appear to be winning some battles in this war. I recently heard Camille Moore, DVM, of Quebec report that vaccines have proven very effective in reducing PCVAD mortalities and the disease's impact appears to be lessening even in herds that have not vaccinated. The word from the Prairie Provinces, though, is that the disease is spreading and causing more severe problems.
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The catch, of course, is vaccine availability. From everything I hear, PCVAD vaccines will be hard to come by for several more months and may not be widely available until well into 2007.
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The practical implication of a smaller Canadian breeding herd, lower Canadian pig crops and growing exports of feeder pigs to the United States is that Canada will not have enough slaughter hogs to fill its packing plants (see data tables below). Maple Leaf's decision to cancel its plans in Saskatoon is symptomatic of that situation and don't expect the symptoms to go away any time soon. It is very difficult for Canada's packers to compete with a dollar nearing par with the United States, especially when they are being forced by a burgeoning oil industry to pay very high wage rates.
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<b>Here's the "Up" Side</b>
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With all of the factors -- slow growth in the United States, potentially very high feed prices, reductions of supplies in Canada, reduced slaughter in Canada (thus reducing the amount of product available for export) -- is it really any wonder that hog futures have been steadily higher in recent weeks? Every contract on the board touched contract life highs on Thursday, and every one except December 2006 set records for highest daily closing price.
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The average price of the Chicago Mercantile Exchange (CME) Lean Hogs futures contracts on the board (Dec. '06 through Dec. '07) was $68.38/cwt. carcass on Thursday. This would translate to just over $51/cwt. on a live weight basis, probably more than compensating for the roughly $30/ton rise in feed costs over the past month.
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Don't get caught up in the gloom and doom of feed prices. The market for your product is offering some profit opportunities and you should manage them carefully over the coming weeks.
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<font color="red">Steve R. Meyer, Ph.D.<br>
Paragon Economics, Inc.<br>
e-mail: <a href="mailto:steve@paragoneconomics.com">steve@paragoneconomics.com</a></font>