Statistics Canada Quarterly Update

Statistics Canada’s quarterly hog inventory report was released in late April. Canadian hog producers reduced their inventories marginally during the first quarter of 2004. Most provinces experienced limited declines. Inventories dipped to 14.6 million hogs as of April 1, 2004, according to a survey of 2,200 hog producers. That’s a drop of 0.4% from January 1, and 0.1% lower than the same time last year. The breeding herd increased by about 2% in both the east and the west.

As usual though, it is not very useful to talk about Canada as a whole given the wide variance in trends across the country. For example, Manitoba’s breeding herd saw the biggest increase in Canada at 3.7%. It is not unusual for Manitoba to lead the country. Quebec’s breeding herd was flat. That is also not unusual given that province’s moratorium on expansion. For its part, Alberta’s breeding herd declined slightly, which is fairly typical of performance in the last two years. Market hog numbers increased by nearly 8% in Manitoba. Ontario followed in a distant second at 3.8%.

It is interesting to note that according to Statistics Canada, the industry’s farrowing intentions continue to be very aggressive. Canadian farrowing intentions are said to be up by about 6% in the second quarter of 2004. If you can believe it, Ontario producers say they are going to farrow over 10% more this spring compared to last spring. Alberta producers are also saying that they are going to belly-up and build some inventory. Alberta producers claim to want to farrow an additional 8% in the April to June quarter. Of course, I don’t know how it is possible to increase farrowings while decreasing the breeding herd, but that is what Statistics Canada is saying.

Generally speaking, the western sow herd continues to grow, led by Manitoba and followed by Saskatchewan. As noted above, Alberta has bucked the western trend and has reduced its breeding herd, notwithstanding its stated intentions to farrow more this spring. Figure 1 shows Alberta’s sow herd trend in relation to the total western trend.

The figure clearly shows that Alberta’s sow herd has been almost completely steady since 1992. That is in sharp contrast to the herd in the west, which has been growing rapidly since 1997. While many could look at this Alberta performance in a negative way, the fact is that a steady herd is very impressive given the severe drought that the province has experienced in recent years.

Another interesting part of the Statistics Canada data is the contrast between the breeding herd and the market hog numbers. By that I mean that in the last several quarters, it has been typical to see sow numbers increase in Canada while market hog numbers decrease.

That of course is the result of the fact that while sow numbers grow, weaner exports have grown in tandem, or more, resulting in that divergence. That is to say, given the weaner exports, the market hog numbers in Canada on the ground have actually increased. In the west, however, based on the Statistics Canada numbers, that trend might be changing. Figure 2 shows the western trend in sow numbers and market hog numbers.

The figure indicates that in the west, while market hog numbers were declining in 2003, during the past two quarters, their volume appears to be increasing. It is best to wait a few more quarters before we make any definite statement about what that means, but it is worth watching.

CVD and Anti-Dumping

The biggest news since the last quarterly market letter was that the U.S. government, at the request of our friends the National Pork Producers Council, launched a countervailing duty and anti-dumping investigation. The U.S. Department of Commerce (DOC) recently initiated two separate investigations into live swine from Canada as a result of a petition submitted by the National Pork Producers Council, representing the U.S. hog industry. One is an investigation into whether Canadian live swine are subject to countervailable subsidies and the second is in response to allegations that our live swine exported to the United States is sold at below fair value (the anti-dumping case). The Canadian Pork Council (CPC) is working with its provincial member organizations to defend against these charges.

As this newsletter went to press, the U.S. International Trade Commission (ITC) had not yet arrived at a preliminary determination of whether the imports of Canadian swine, other than purebred, cause or threaten to cause injury to the U.S. industry. If the finding is negative, the investigation will terminate. If it finds there is some way that there could be injury, the investigation will proceed.

The DOC will issue questionnaires to the Canadian government, with sections to be completed by both the federal and provincial governments on the specific programs, which are alleged to be providing countervailable benefits. The turnaround time for these questionnaires is normally 30 to 40 days. The period of investigation of what payouts occurred will likely be either the calendar year 2003 or the government fiscal period of April 1, 2003, through March 31, 2004.

The earliest that a preliminary subsidization result is expected is June 11. In the very possible event that the case is considered complex, that could be pushed back to August 16. Even if the result is found to be de minimis (i.e., less than 1% ad valorem), the process will continue through to a final determination. This would involve different teams from the DOC coming to Canada to verify the information provided in the questionnaires. Changes would be reflected in the final result (as early as late August or as late as December).

There has never been a U.S. dumping action involving Canadian pigs before. The DOC will be investigating if Canadian live swine are sold in the United States below the prices at which they are sold in Canada or, if the ‘home market’ sales are at prices below the cost of production, the cost of production becomes the reference point. A likely early step will be the issuance by the DOC of what is called a ‘mini A section’ questionnaire, which will be sent to all known exporters. It will ask basic information on sales numbers and other details.

It is strongly recommended to anyone receiving one of these questionnaires from the DOC to immediately contact your provincial association for assistance. (Source: Canadian Pork Council news release, April 19, 2004.)

Exchange Confusion

The CME’s Daily Livestock Report, April 27, written by Steve Meyer and Len Steiner noted the “explosion” of market hog exports to the U.S. This year, the DLR says imports of this category of hogs have been running an average of 149% higher than a year ago, since January. Meyer and Steiner says that in the past they speculated that as Canada starts to export some of its beef and as the appreciation of the Canadian dollar takes a larger bite out of profits from U.S. trade, we might see a slowdown in total Canadian market hog imports. They say that, “so far that has not happened and it will likely not happen as long as there is such a discrepancy between hog prices in the U.S. and Canada.”

They note, “it may sound simple but the fact is that we are dealing with a well integrated North American market and as long as prices in one region are higher than in the next, there will be an accelerated trade of product from one to the other.” Meyer and Steiner say that live hog prices in Canada during the first quarter of the year increased about 5% from a year ago. In the U.S., live hog prices during the same period increased 25% from last year’s levels - even with the increase in kills. “Prices are okay in Canada but they sure look sweet across the border and no surprise the hogs keep coming.”

The DLR misses the boat entirely with regard to the price differential. First of all, the differential is not the same across the entire country. For example, on a year-to-date basis, Manitoba’s prices are up by about 7%. In Quebec, however, prices are up by about 15%.

Most importantly, however, the reason for the lack of price bounce in Canada this year compared to the U.S. is simply the exchange rate. Last year, to mid-April, the exchange rate averaged just 0.67 cents US. This year, the exchange rate has averaged about 0.76 cents, a difference of 14%. It is a good rule of thumb that for every 1% change in the exchange rate, there will be a 1% change in the hog price. Applying that rule would suggest that if the exchange rate were the same this year as it was last year, then Prairie hog prices would be about 22% higher than they are now. In Quebec, exchange adjusted prices are over 30% better than last year. That compares to the U.S. jump of over 25%.

Another way to look at it is that the U.S. price converted by the exchange rate increased by about 12%. Instead, they only went up about 7% on the Prairies, but 15% in Quebec.

In other words, while market conditions in Canada on the Prairies are not great, the overwhelming reason prices did not jump as much as in the U.S. is the exchange rate. The other much, much smaller reason why prices are not up more on the Prairies is basic supply and demand. Springhill’s full capacity is missed, as is West Perth in Ontario. Increased supplies on the Prairies relative to capacity has also resulted in packers being able to offer lower prices than would have otherwise been the case.

Finally, it is interesting to note that Meyer and Steiner don’t seem to get the fact that when Canadian producers sell hogs south of the border, they are not going to enjoy the full U.S. increase because of the exchange impact. In other words, the big gain in U.S. prices is wiped out by the exchange appreciation.

Price Forecasts

In the last quarterly report I noted the astounding performance of pork and meat demand. Exceptional meat demand has been very supportive to hog prices across North America. That astounding demand performance has continued through the first quarter and into the second of this year. Consider the fact that U.S. pork production is up by 2.8% as of the end of April and that U.S. hog prices are up by 28%. That defies the rules of economics, if not gravity.

It is true that exports seem to be strong and that means increased sales tonnage overseas has been helpful to hog prices. Even accounting for these increased export sales, however, it appears that the real driver of prices has been domestic demand. All of that was simply a way of saying that in an environment where production and prices are up, forecasting prices becomes more of a crap-shoot than ever. In other words, the past is no guide to the future direction of prices and we are in uncharted waters.

U.S. Slaughter

According to the March USDA Hogs and Pigs Report, U.S. hog slaughter might be up by as much as 2 to 3% in the summer compared to 2003. Expectations for the fourth quarter are for no increase over 2003, but recall that 2003’s fourth quarter was nearly record high. So, the bottom line for production is that there is no supply relief in sight for producers. That means that demand has to stay very strong or prices will tank sharply. Figure 3 shows my quarterly slaughter forecasts for the rest of this year and the first quarter of 2005, compared to 2003.

U.S. and Alberta Prices

U.S. price forecasts are based on historical relationships with supply as well as an improved demand factor. These forecasts assume that the recent demand performance will continue. The Alberta price forecasts are based on the U.S. price converted by the exchange rate, as well as a local supply demand factor. With regard to the exchange rate, the George Morris Centre’s Larry Martin notes that the spread between Canadian and U.S. short interest rates was going to move back in favour of the U.S. In turn, this means short-term investors will switch from Canadian to U.S. debt, thereby decreasing the demand for Canadian dollars. Finally, the loonie really flopped when Nortel did its show and tell, thereby whacking the Canadian equity market.

Where is the loonie likely to go from here? Martin says that the uptrend is over. Current futures markets suggest that traders see a 0.725 cent dollar for the rest of the year. For the purposes of this forecast, that will be the exchange rate used. As noted here before, if the exchange rate changes by 1%, Canadian hogs will change by a percent in the opposite direction.

With regard to local supply and demand, many producers have seen their contracts renewed at lower levels or not renewed at all. In other words, price spreads look to be weakening relative to the U.S. market. That has to be taken into account in the forecasts as well. Figure 4 shows the U.S. and Alberta price forecasts, based on the above noted discussion.

The U.S. price forecast for the third quarter is a full $10/cwt higher than what I forecast in the last issue of this report. At the risk of repeating myself, it is important to note that the only way prices as high as these forecasts could materialize is if demand stays very strong.

Source: Alberta Pork Market Review Spring 2004