The spring market in 2009 is arguably the worst market in the last 10 years. Given the performance of the market in the last four, that is quite a claim. While some may argue whether the spring of 2009 is the worst market, there is no argument that it is the most disappointing. Spring and summer of 2009 were offering the hope of profits for the first time in three years. Declining grain prices, a depreciated dollar and firmer hog prices were finally going to offer limited black ink to Canadian producers. Instead, the H1N1 virus scare caused export and U.S. domestic markets to collapse. Hog prices have been exceptionally weak this spring due entirely to the H1N1. While U.S. markets are very poor, the appreciated Canadian dollar made a bad market even worse in Canada. In fact the appreciated Canadian dollar completely hammered the Canadian hog market.

U.S. Price Forecast

Figure 1 shows the performance of U.S. hog prices for the 2003- 2007 average, 2008 and the first five months of 2009.

As can be seen in Figure 1, the normal spring rally has been totally lost this year. The only possible explanation is the loss of export markets due to Russian and Chinese protectionism, and the erosion of demand in Mexico. In addition, anecdotal information suggests that the U.S. domestic market has also been adversely affected by the onset of H1N1. The fact that the World Health Organization began to call H1N1 a pandemic, ensured that the virus stayed firmly in the news and on the minds of international buyers and domestic consumers.

The loss of the spring rally completely washed out the prospects for profits for U.S. hog producers this spring. According to Iowa State University’s John Lawrence, U.S. hog producer margins on farrow-to-finish were in the red by over $18/head in May. June does not look much better. Margins were red for January through April in the U.S.

It is very difficult to forecast pricing in an environment driven by protectionism and consumer fears. Just when it appears the market has put the problem behind it, something happens to put the issue back on the front burner.

Based on the performance of the market in the second quarter and based on expected slaughter, U.S. carcass prices are going to have a real struggle to average around US$62/cwt in the third quarter. By the fourth quarter, if we assume that the H1N1 issues are forgotten, the market should bounce back, counter-seasonally to the mid-$60’s. First quarter 2010 should hit the upper $60’s.

Sow Numbers

According to Statistics Canada data, first quarter 2009 sow numbers declined by 6 percent in 2009 compared to 2008 for all of Canada. Sow numbers are down by 15 percent in early 2009 compared to the first quarter of 2005. That was the year of the highest first quarter sow inventory for Canada. Market hog inventories were down by 9 percent this year compared to 2008 and down by 21 percent compared to the peak year of 2005. In Alberta, sow numbers of 160,000 head, only declined by 5 percent in 2009 compared to 2008. Sows are down by 18 percent in the first quarter of 2009 compared to the first quarter of 2005.

Figure 2 shows sow numbers in Canada, Quebec, Ontario and the Prairies.

Figure 3 shows the breakdown of sow numbers by province on the prairies.

According to Statistics Canada, there are now less than 600,000 sow on the prairies, down 15 percent from the 2005 first quarter peak. Saskatchewan’s numbers are particularly interesting, having declined by 20 percent in 2009 compared to 2008 alone. Manitoba’s year-over-year decline was 6 percent and only 9 percent versus 2005. As of the first quarter of 2009, prairie sow numbers are now at the levels that they were in 2000-2001. In Alberta, at 160,000 head, sow numbers are at levels not seen since 1986, more than 20 years ago.

Looking forward, there was little doubt that the erosion in numbers would have continued in Canada, even with an C$ 0.80 and no H1N1. With the loss of potential profits in the spring and summer of this year, however, the 2009 losses are going to be severe and will push many more producers and sows out of the mix.

Further to that point, The Western Pork Investment Corporation (WPIC) is an entity designed to investigate, assess and facilitate investment in Olymel, Red Deer. The ultimate goal is to increase volumes through Red Deer in order to generate critical mass. This, in turn, will increase Olymel’s competitiveness. The other goal is to help generate more income for producers, create vertical coordination efficiencies and the recoup potential profits from the investment.

The target of the overall operation is to get Olymel back to a full double shift operation at 80,000 head per week. The 80,000 weekly kill would require upwards of 200,000 sows. As noted, at last count there were 160,000 in Alberta. In addition to Olymel, that sow base is supplying Maple Leaf Lethbridge, Sunterra, Sturgeon Valley Pork, J&M Meats and Britco in B.C. Then there are the 2,000 - 4,000 head that go to provincial plants. According to the Canadian Pork Council, by spring 2010, the west, including B.C., will have kill capacity of more than 175,000 head per week. That comes after Springhill gets to over 27,000 head per week from its current 18,000. If Red Deer goes to 80,000, and if or when Lethbridge shuts, western capacity would be about 204,000 per week. That, in turn, means potential kill of well over 10 million per year. In 2008, western kills were barely over 8 million. Kills of 10 million need a sow base of 490,000 - 500,000 sows. As of early 2009, the west, including B.C. had over 600,000 sows.

Last year it took about 280,000 - 290,000 sows to generate the 5.7 million head western weaner/feeder flow to the U.S. That business is now doubtful due to COOL. Clearly there is the sow capacity in the west, but most are in the eastern Prairies. In addition, the dismal financial returns this spring due to the dollar and H1N1 are going to send thousands more sows to slaughter. Then again, there are many sow barns around from Manitoba to Alberta that could be bought cheap or ramped up again. Finisher space is the challenge and would need to be built. With such a tight lending market, however, there are major questions on the source of funding.

Canadian Dollar

According to TD Securities, the CAD rose a little more than 9 percent in May, the strongest one month gain in decades. TD Securities has upgraded their CAD forecast to par for the end of the year. This is a relatively aggressive forecasts upgrade but it is justified by the weakness they still expect to see in the USD and the relative strength of Canada’s structural position.

TD says rising commodity prices mean that at least some of the CAD’s strength is fundamentally justified and with the global economy showing signs of stabilization, they do not think policy makers will be at all anxious to undertake any additional stimulus measures to offset CAD strength. With Canada’s budget deficit, debt and current account shortfall position still looking superior relative to many of its peers, TD thinks investors casting around for a safe, relatively “hard” currency alternative to the USD will continue to look favorably on the CAD. The speed of the May rally does suggest the risk of a short term correction in the CAD but they still expect near term weakness to remain confined to the 85-87 cent (US) range at present and for the CAD to reach parity against the USD around the turn of the year. (Source: http://www.td.com/ economics/global/gm0609.pdf)

Alberta Price Forecasts

As of this writing, the C$ is holding around US¢/C$0.91, based on that exchange rate and based on the US hog price forecasts, the following are the Alberta index 100 forecasts for the third quarter through the first quarter 2010.

Third quarter ‘09: C$125/ckg
Fourth quarter ‘09: C$135/ckg
First quarter ‘10: C$135/ckg

May 2009