The Canadian hog industry has faced many challenges in recent years. The trends that continue to unfold will surely affect the supply of pigs, market hogs and pork that cross the U.S. border over the next year or so.
As we take a closer look at pricing, margins and developments in the Canadian market, unfortunately, one of the biggest developments that must be addressed is mandatory country-of-origin labeling (COOL).
Market analysts have a tendency to say they are not surprised by certain market events, giving the impression that they have the foresight to deal with anything the market can throw at the industry. For my part, however, I must admit to being totally surprised at how effective country-of-origin labeling has been at shutting down the flow of market hogs from Canada to the United States.
In my opinion, all industry participants on both sides of the border recognized the primary purpose of COOL was to impede the flow of Canadian meat and livestock into the United States. With that said, even the most protectionist U.S. cowboy could not have predicted how well COOL has curbed that flow.
The best example is how market hog exports from Canada have slowed to a trickle in less than six months after COOL's enactment. Exports of Canadian slaughter hogs to the United States averaged about 12,000 per week in the first quarter of 2009, compared to over 58,000 in the first quarter of 2008. A similar, but less dramatic trend is seen with exports of weaners and feeder pigs — 102,000 per week in 2009, compared to 150,000 per week in the first quarter of 2008.
The only Canadian exports to the States that are up are slaughter sows and boars. Canada has virtually no slaughter capacity for sows, so culls must go to U.S. packers. As the Canadian industry rationalizes, the sows flow across the border. An added bonus to U.S. packers is that sausages are not part of COOL, so sows essentially get a free pass.
Hog Flow Affects Both Sides
The decline in live hog exports from Canada is having big implications for producers on both sides of the border. The sharp decline in weaners and feeder pigs has created a high demand and higher prices.
More ominous, however, is the short supply of pigs to Midwest finishers who depend on Canadian pigs for finishing, and the U.S. packers who also relied on those pigs.
Meanwhile, in Canada, producers are taking the mothballs out of finishing spaces across the prairie provinces and packers are gearing up slaughter and processing facilities. Pigs normally raised in U.S. finishers are now being fed and slaughtered in Canada.
In early 2009, Canadian producers enjoyed a clear feed cost advantage, particularly in the prairie provinces, which will encourage more Canadian feeding.
Although this is somewhat of a minor, positive note for Canada, the overall market situation faced by the Canadian industry remains very difficult.
As a starting point, pork producers across Canada enter the second quarter of 2009 with a trend of consecutive losses going back to the fourth quarter of 2006. Figure 1 shows annual net return estimates to prairie producers over the past 10 years. Of course, losses of this magnitude mean significant rationalization for the entire Canadian pork industry from producer through packer. Market hog numbers have declined by 19% from its 2004 peak.
As of the last quarter of 2008, the Canadian sow herd had declined by 14% from its peak in the fourth quarter of 2004.
Figure 2 shows the trend in the Canadian sow herd from 1990 through 2008.
In early 2008, the Canadian government announced the Cull Breeding Swine Program, a $50 million program designed to help the pork industry restructure by facilitating the reduction of the breeding herd (sows, boars and pregnant gilts) by approximately 10%. Qualifying producers, subject to application approval, received $225 per breeding animal culled after April 14, 2008.
To participate, approved producers had to agree to depopulate an entire breeding barn and not restock the barn with breeding animals for three years. The program was retroactive into 2007, and officially ended in September 2008.
The breeding stock buyout program likely helped some producers who were trying to decide whether to exit the industry. Mainly, it just provided a financial boost to those who were probably going to leave the industry anyway.
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In the Canadian packing industry, there has been a rationalization occurring for the past three years. The two largest packers, Maple Leaf and Olymel, have made difficult decisions to close plants and consolidate production.
Olymel closed a plant in Quebec, while Maple Leaf closed one plant in Saskatchewan and announced plans to close or sell three others in Alberta, Ontario and the Maritimes. Maple Leaf also plans to consolidate its slaughter in Brandon, Manitoba by double shifting that plant.
Clearly, part of the reason for the dramatic decline in Canadian slaughter hog exports in the first quarter of 2009 was due to the closure of the plant in Saskatchewan in mid-2007 and the double shifting at the Brandon plant in mid-2008. Prior to the double shift at Brandon, the closure of the Saskatchewan plant forced hogs south that normally would have stayed on the Prairies. Therefore, COOL does not get all the credit or the blame for the decline in market hog exports.
Another piece of good news, particularly for Ontario producers, is that Maple Leaf will hold off on the pending sale/closure of its 45,000-head-per-week Burlington plant, which was scheduled for the fall of 2009. Now, Maple Leaf is saying that with the difficult financial environment, the time is not right for a sale.
Ontario producers now have a significant reprieve from the possible closure of a plant that slaughters nearly half the weekly marketings in the province.
The rationalization of the Canadian pork packing industry by Olymel, Maple Leaf and others is going to result in a more competitive industry. This, in turn, will generate higher prices for Canadian pork producers.
Value of a Dollar
Finally, another positive development in terms of hog pricing was the depreciation of the Canadian dollar or, more correctly, the appreciation of the U.S. dollar. Given that Canadian hog prices are based on U.S. prices, any depreciation in the Canadian dollar simply results in higher Canadian hog prices. The depreciation that occurred last fall resulted in a material increase in Canadian hog prices. While it also boosted grain prices, the net effect was positive for Canadian hog margins.
Canadian Industry's Future
Looking ahead, it can be expected that Canadian hog inventories will continue to decline through 2009, although at a slower pace. Based on grain and hog price forecasts, Canadian hog producers might be in the black this spring and summer, but not by much. Margins will dip back into the red in the fall.
In other words, the financial situation may force more producers to leave the industry. Still, the positive factors noted above suggest that the worst has passed. The impact of COOL should begin to have less of an impact as U.S. finishers and packers learn to deal with Canadian hogs more efficiently. This adjustment is likely to accelerate as U.S. pig supplies become increasingly tight.
The Canadian pork industry continues to wade through one of the longest stretches of financial stress ever experienced. Nevertheless, the industry can rightly look forward to a period of consolidation, if not outright growth, in the coming years.