The performance of the U.S. hog market has been characterized in many different ways in 2006, most of which relate to disappointment. While price levels may have been disappointing to producers, the general performance of the market has been fairly normal. Figure 1 shows the 10-year average U.S. hog prices on a carcass basis in comparison to the pricing in the first five months of 2006. As can be seen, with the exception of April, when prices counterseasonally sank, the hog market has been performing right on cue. In fact, the increase in pricing during May was far better than seasonal norms. Usually from April through May, prices can be counted on to increase by 12 percent. This year the April-May jump was 19 percent.

At least part of the reason for the recovery in pricing this spring has been the recovery in chicken pricing. Pork and chicken are substitutes for each other, so changes in the chicken market can be important to pork pricing. In that regard, the chicken market was suffering through a very bad winter. Concerns about Avian Influenza were dampening world export demand for chicken, which caused U.S. chicken prices to slump. The old adage of low pricing curing low pricing came to fruition however, as the near record low price on leg quarters caused international buyers to wade into the market.

According to the United States Department of Agriculture (USDA) first quarter 2006 broiler exports totalled 1.338 billion pounds, considerably higher than previously estimated. The first quarter broiler exports were nearly 12 percent more than the first quarter of 2005. USDA says that it is likely that low prices for leg quarters spurred large purchases that more than offset lower shipments to areas with AI concerns. Broiler exports this year are expected to total 5.5 billion pounds. That compares to 5.15 billion last year, an increase of six percent.

It is important to note that during the winter, the bad news in the chicken market translated into pressure against pork prices. As such, the more positive expectations for chicken exports for the rest of 2006 should be considered as a positive development for pork pricing.

While the discussion is focussed on exports, it is worth noting that U.S. pork exports are more important than ever. The U.S. is now the largest world exporter of pork. In 2005, nearly 13 percent of U.S. production was exported, compared to just eight percent in 2001. Given the magnitude of U.S. exports and their importance, it is some comfort to note that the U.S. pork export machine continues to rumble in 2006. First quarter U.S. pork exports were a whopping 22 percent more than last year’s first quarter. The USDA’s Economic Research Service asserts that pork exports will continue to be a critical component of total U.S. pork demand in 2007. Exports of three billion pounds are expected next year, an increase of five percent over 2006 forecast exports of 2.89 billion pounds.

Exports will likely account for 14 percent of production next year, a huge leap from just 10 years ago, when the export-proportion of production was just over six percent. Factors assumed to positively influence exports next year include favourable exchange values of the U.S. dollar compared with currencies of competitors, together with lower U.S. prices brought about by larger pork supplies and continued strength in the Japanese, Canadian and Mexican economies. Factors that could mitigate growth next year include adjustment and acceptance rates of Asian consumers as markets reopen to North American beef products. Market responses to disease outbreaks may add uncertainty and volatility in international pork markets as well (USDA Economic Research Service, Livestock, Dairy, & Poultry Outlook, May 18, 2006).

With that export context provided, the other key variable is obviously U.S. production. In that regard I expect to see total U.S. production this year in the range of 21.3 billion pounds. That is roughly three percent more than in 2005. U.S. production at that level will mean that 2006 will be another in a long line of record production years. As such, continued strength in exports will be crucial to keeping prices reasonably firm in 2006. That is, because over the last 20 years, North American pork demand can be characterized as being very steady and stable. So if production is going to be record large, that would imply that the industry needs more than domestic demand to keep prices from collapsing. Based on USDA export forecasts, it would appear that total U.S. pork supplies (production, plus imports less exports) will be less than a record but will still be exceptionally large.

The fact that production and total supplies continue to surge forward obviously results in concerns regarding pricing. The fact is that not too long ago, meaning less than six years ago, production of over 21 billion pounds would have resulted in a pricing collapse. Further to that point, last year saw total supplies of over 19 billion pounds. During the late 1990s supplies at that level would have meant U.S. carcass prices of around $40-45/cwt. Instead, actual prices last year were a healthy $68/cwt. That is a “premium” over the 1990s of about 58 percent. Given that domestic demand is steady in the U.S., the source of the “premium” has to be exports. That once again sheds a light on why exports, in this case U.S. exports, are so important.

The fact is, since 2001, the U.S., and by default Canada, has been enjoying a solid export premium over what would have been the case in the 1990s. Figure 2 shows annual prices in the U.S. plotted against annual U.S. supplies. The graph illustrates that during the 1990s there was a fairly predictable relationship between supply and price. For example, in 1993, in the middle of the graph when supplies were about 17.5 billion pounds, prices were about $65/cwt. In 1990, when supplies were tight at about 16 billion pounds, prices soared to $80, and of course the opposite happened when production soared in 1998 and 1999. Interestingly, in 2003, 2004, and 2005 supplies were far more than in 1998 and 1999, yet prices were pretty good. That is that export premium at work.

With regard to 2006, I am forecasting an annual average price of about $63/cwt. While that forecast is down seven percent from 2005, it still represents a sizeable premium over what would have been the case only six years ago, given the expected supplies and production. So while it may be a disappointing forecast from a producer’s perceptive, it is important to recognize that there is a great deal of favourable activity going on to generate a price level that high. With that U.S. forecast in mind, the following are the price forecasts for Alberta for the third and fourth quarters of 2006 as well as the first quarter of 2007:

Prairie Situation

It seems like every year the flow of hogs south from Ontario and the prairies continues to grow. As such it appears to be redundant to say that exports of live hogs are increasing again in 2006. With that said, 2006 looks to be shaping up to be an extraordinary year in that regard. Figure 3 shows exports of weaners and feeders from Canada to the U.S. this year compared to last year.

As can be seen, exports of weaners and feeders are very high compared to last year. Year to date, shipments of hogs less than 110 pounds have been running 13 percent over last year. According to the USDA’s Economic Research Service, that trend is supposed to continue this year and into 2007. The Department says that U.S. imports of Canadian swine are expected to increase 5.6 percent in 2007 to 9.4 million head from forecast 2006 imports of 8.9 million head. The proportion of imports comprised by animals weighing 50 kilograms or less is expected to increase next year beyond levels seen in 2005 — 66 percent — and to surpass the highest level achieved: 68 percent in 2003. The Department says “continued appreciation of the Canadian dollar, which tends to make Canadian pork products more expensive in international markets, is likely to persist in limiting prices that Canadian slaughter operations can pay for hogs. Comparatively lower prices offered by Canadian packer/processors create incentives to export swine to the U.S. where costs of finishing swine are typically lower, and packer/processor bids are typically higher than in Canada.”

So USDA is essentially saying as fact something that producers have been asserting for years: Canadian hog prices are too low to keep hogs in Canada. Clearly Canadian producers are reacting to the simple economics of the hog business. Iowa early wean pricing is very strong while Canadian market hog prices are very weak. Every market hog shipped in Canada was turning a loss in the first quarter while early weans shipped south appear to be very profitable.

Whether those shipments are from Ontario or the prairies, however, it is hard not to be concerned about the implications. Many in Canada think it is just a matter of time before the National Pork Producers Council (NPPC) takes another run at getting tariffs in place. I think that is less likely given that many U.S. hog producers have come to realize the importance of Canadian shipments to their industry. The real reason for concern is that the shipments are symptomatic of a lack of competitiveness in Canada. Canadian feed grain productivity is falling behind the U.S. Whether the corn countervail impacted pricing in Ontario or Canada is still being debated but it clearly is an issue for hog feeding. In addition, market hog pricing is not as strong as in the U.S. At least part of the reason for the market hog pricing erosion is the fact that Canadian packer competitiveness is lagging behind that of the U.S. Furthermore, at this rate of weaner export growth, it is only a matter of time before packers start to notice market hog numbers shortening in Canada. That could have implications for packer expansion plans.

The growth of the weaner trade into Iowa during the mid to late 1990s and early 2000s reflected structural change and comparative advantage. That is still the case today. Nevertheless, the ongoing surge this year is also reflective of underlying problems in Canada that could have far reaching implications from farm through packer.

News reports out of Manitoba suggest that there is strong opposition to the Olywest plant proposed for Winnipeg. Some city councilors are getting cold feet and are trying to back out of their deal with the Olymel, Hytek and Big Sky consortium. With that noted, consider the margins in the packing business and the labour challenges in Red Deer and the trend in weaners heading south versus staying for slaughter. Given all of those factors, it would not surprise me if Olymel was quietly hoping that those flighty city councilors would in fact pull the plug and give them a graceful way out.

Speaking of looking for a way out, Maple Leaf is going back to the drawing board with its planned pork processing plant in Saskatoon, after construction bids exceeded cost estimates by 25- 30 percent. "They're escalating on a daily basis as a result of construction projects that are underway in Western Canada. It's just a product of the economic environment out there," said Jeannette Jones, a Maple Leaf spokeswoman. Jones said it was too soon to speculate whether the company would opt for a different location because of the higher than expected bids, which have since expired.

Construction and labour costs in Western Canada have soared in recent years, in part because of multibillion-dollar projects in the region's booming oil and gas sector. Maple Leaf is looking for ways to reduce project costs to match its original estimate of $110 Cdn million, while keeping its scope the same, Jones said. Maple Leaf said it would build the plant to replace the 66 yearold Mitchell's plant in Saskatoon, which it acquired through its purchase of Schneider Foods. The Mitchell's plant processes approximately 17,000 hogs weekly. The proposed plant would be constructed on a new site and process 20,000 hogs a week on a single-shift basis, with the capacity to expand to 40,000 hogs on a double-shift operation.

Arrangements with municipal and provincial governments require construction to begin by the end of 2006, Jones said. "We'll have some realignment on the project cost within the next couple of months," she said (meatfyi.com, May 10). To my way of thinking, the only way that plant made any sense at all was the fact that the province of Saskatchewan was going to dump $35 million into it. Even then it was hard to figure the rationale for another mid-sized plant on the prairies when Brandon was running at half its potential.

Speaking of provincial money, on May 3, the Regina Leader Post reported that Worldwide Pork “has cobbled together sufficient financing to proceed with a plan to reopen its doors, a lawyer for the company told a Regina court Tuesday, May 2.” Worldwide Pork is aiming to reopen June 5, said Rick Van Beselaere. A combination of subordinated debt, equity and provincial money has been arranged, he said. The financially troubled company has been under court-ordered bankruptcy protection since last summer as it tries to restructure.

The provincial NDP government announced at the end of April that it would provide up to $1.5 million to cover some of the plant's start-up costs, contingent on the company securing its other investors and necessary approvals. The company still has to ensure documents with respect to the "financial puzzle" are in place, the corporate structure needs to be finalized and arrangements need to be made to call some of the employees back, he said. Worldwide Pork officials are also working to ensure a supply of hogs is ready. Union members who worked at the processing plant voted last weekend in favour of a proposal that will make them shareholders in the company.

Source: Alberta Pork Market Review Spring 2006