Last week’s Hog Statistics report from Statistics Canada indicated an increase in the year-on-year rate of reduction of the country’s breeding herd compared to the January report. The April 1 breeding herd inventory was 1.304 million head, 28,000 fewer than the revised Jan.1 estimate and 81,000 head (5.8%) fewer than on April 1, 2009.
The revision to the Jan. 1 estimate was smaller than I expected, taking it from 4.3% lower than one year ago to 4.5% lower. Recall that the Jan. 1 breeding herd decline was much smaller than Stats Canada’s estimated 7.8% decline of both Oct-Dec farrowings and pig crop. The April report revised the fall pig crop up slightly, but the percentage change for those three categories still do not agree well at all.
The Canadian reductions leave the Canada-U.S. breeding herd at 7.064 million head, 4.2% lower than one year ago (Figure 1). This marks the first time since January 2000, which includes the December 1999 U.S. breeding herd estimate, that the combined breeding herd has been 4% or more smaller than one year earlier. It also marks the fifth-straight quarter of a record-low Canada-U.S. breeding herd, using data that dates back to 1977. The record-low prior to January 2009 was in April 1986 at 7.445 million head. At that time, Canada had only 1.067 million breeding animals and the United States had nearly 6.4 million head.
As of April 1, Canada’s total pig inventory numbers 11.635 million head, 2.1% lower than one year ago. That figure is 22.5% lower than the highest April 1 level on record back in 2006, and 23.5% lower than the highest Canadian inventory on record in October 2005.
Wrestling with Exchange Rates
The increase in the rate of liquidation north of the border is largely due to the negative impact of a Canadian dollar that is once again flirting with par value vs. the U.S. dollar. This shift in exchange rates has been a major driver of Canadian liquidation for several years, and one that Canadian producers had hoped was gone when the Canadian dollar fell from par value ($1Can to $1US) in early 2008 to $0.80 US in the first quarter of 2009 (Figure 2), the initial stages of the “Great Recession” when the entire world ran to the U.S. dollar in spite of all of our problems.
But the worm has turned over the past year and the Loonie (a nickname for the Canadian dollar because it has a loon on it) is again approaching par value. This means that Canadian producers generate far less revenue in Canadian dollars when they sell pigs, regardless if they sell them in Canada or to the United States. Canadian prices are just U.S. prices adjusted for the exchange rate.
The impact can be seen by comparing Canadian and U.S. price in our Production and Price Summary table (attached). That’s a bit difficult to do this week since the Canadian data is missing values for three of the four provinces that I report. Last week’s year-on-year percentage changes for Canadian prices were from 4% to 14% higher, while U.S. prices were 25% or more higher than one year ago.
While the return to profits will probably slow the exodus of Canadian producers, I fear that, if a par exchange rate persists, the decline will not stop. U.S. producers turned a profit in March and April. I think Canadian producers were only breakeven at best during that time period. U.S. producers are looking at handsome profits this summer but margins in Canada, given current conditions, will be positive but not great. The question remains: Will Canadian producers and lenders see this as a very good opportunity to exit before things get tougher again?
Cash Receipts not a Profit Indicator
USDA released its annual Meat Animals Production, Income and Disposition report last Thursday. It should be noted that “disposition” here implies nothing about personality – it is derived from “disposal” to account for just where the animals ultimately wound up during the year. The most watched numbers from this annual report are usually the ones measuring production and its value. Total cash receipts by U.S. hog farms amounted to $14.39 billion (Figure 3). That is the fourth-largest amount ever, but it trailed the 2008 record of 16.05 billion by 10.3%.
The impact of ethanol-induced feed cost increases can be seen very clearly by considering this: The years with the highest-and fourth-highest cash revenues on record resulted in the “worst ever” two-year period for profitability in the U.S. hog production sector.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com