Report Highlights

Canadian cattle and hog herds face continued pressure from drought conditions, low sales prices, fluctuating feed costs, and soft domestic and export markets. However, if the overall economic recovery continues and no other major shocks occur, 2009-2010 should be the trough with rebuilding emerging, especially in cattle, in late 2010. Distress is exemplified by live exports where hog and cattle exports dropped over 30 per cent January-June 2009 compared to January-June 2008. Factors causing the decline include the stronger Canadian dollar, slump in US demand, high US stocks and changes in US labeling rules. The difficult situation facing the hog industry has prompted the second restructuring program in as many years. Details should be available in the next few months and include buy out provisions, long term commercial loans and support for export promotion. Canadian beef exports were buoyed by negotiations with Hong Kong, Taiwan and Jordan as Canada claws back markets lost after the 2003 BSE detection. Insufficient progress with South Korea prompted a Canadian WTO dispute settlement case. US beef exports are forecast to rebound by 2010 spurred by demand for high end cuts in the hotel and retail sectors.

Executive Summary

• Canada initiated a WTO dispute settlement case in December 2008 arguing COOL was creating undue restrictions on cattle and hog exporters. As of August 2009 Canada has not taken the next step of requesting a WTO dispute resolution panel.
  
  
• The Canadian hog herd is forecast to continue its decline into 2010 (11.5 million head) as the industry faces the third consecutive year of low returns. This follows a record herd decline of 12 per cent during CY 2008.
  
  
• Total domestic hog slaughter numbers are projected to peak at 22.4 million head in 2009 and decline in 2010 as the industry adjusts to the lower overall.
  
  
• Based on January to June 2009 data, post estimates that Canadian live hog exports to the United States may fall nearly 40 per cent during 2009 translating into a one year decline of over 3.0 million head due to factors including stronger Canadian dollar, record US pork stocks, and changes in US labeling requirements.
  
  
• Canadian pork imports are forecast to follow the longer term trend and increase to 200,000 MT in 2010 with a stronger Canadian dollar and higher demand for high quality US fresh cuts. Following a strong 14 per cent increase in 2008, US pork sales to Canada during the first six months of 2009 declined over 10 per cent.
  
  
• Canadian pork exports are forecast stable in 2010 at about 1.13 MMT with expanded non-US growth spurred by lower prices but restricted by stronger Canadian dollar.
  
  
• On 15 August 2009 Canadian government announced a C$92 million restructuring plan for the hog industry. The actual specifications/requirements/approvals of the program are to be developed over a few months.

Production

Strong hog inventory and production declines continue

The Canadian hog herd is projected to continue its decline into 2010 (11.5 million head) as the industry faces the third consecutive year of low returns. The government is again poised to assist in restructuring which will likely encourage additional hog farmers to leave the industry. This follows a record herd decline of 12 per cent during CY 2008, and further declines are projected in 2009 and into 2010. Hog farmers are expecting to lose C$45–55 per hog in 2009 according to Canadian Pork Council (CPC).

Total domestic hog slaughter is projected to peak at 22.4 million head in 2009 and decline in 2010 as the industry adjusts to the lower overall. The increase for slaughter and pork production in 2009 is attributed to more weanlings being fed to slaughter in Canada rather than exported for finishing to the United States. Finishing operations in the United States have been discouraged from importing Canadian live hogs without a discount as attributed to increasing segregation, and/or accounting costs required under the US country of origin labeling (COOL). Manitoba’s industry has been worst hit due to its level of production of weanlings normally exported to United States feeding operations. Reportedly, some producers have lost most or all of their usual customers and are now competing for space in Canadian finishing facilities. Slaughter hog exporters are competing for space among Canada’s remaining packers.

According to Statistics Canada, the Canadian hog industry continued its transition during the second quarter of 2009 and farmers reported 12.1 million hogs on their farms as of 1 July, a decline of nearly 7 per cent from one year earlier and a cumulative decline of 20 per cent from the herd peak size of 15.1 million in 2006.

With high feed costs, an ongoing recession and low pork prices, Canadian hog industry leaders report this as the worst financial crisis the industry has witnessed. This is exacerbated by continuing strength of the Canadian dollar. A Government of Canada (GOC) recovery plan announced in August of 2009 will aim to support viable hog operations through loans while helping non-viable operations transition out of the industry. The plan is valued at C$92million.

Hog market prices

Hog prices are expected to remain relatively stable with weakening negative perceptions regarding H1N1, and are projected for an eventual moderate increase in late 2010 depending on how quickly the industry can begin restructuring and reduce total herd size. There appears to have been some recovery in prices with early 2009 levels higher than those one year earlier, however, beginning in May, prices had again fallen below levels of the previous year.

Consumption

Domestic pork per-capita-consumption is projected to remain relatively flat in 2009 and 2010 at about 23 kg. Low consumer prices should counter concerns caused by the mislabeling of H1N1 and the recession. However, per capita consumption at the 23 kg is a level not seen in the Canadian market in 15 years. According to Statistics Canada, per capita pork consumption in 2008 declined 4.8 per cent from the year earlier level and has fallen below the 2005 low. Some of the longer-term factors behind declining pork consumption during that period include 1) Relatively strong retail prices during a period when BSE-related issues boosted Canadian beef supplies, 2) Consumer perception the the preparation of pork based meals at home is lengthy compared to other meats; 3) Pork’s limited success to capitalize on foodservice market gains shared by other meats and fish; and, 4) Lack of perception that pork is a “healthy” meat.

Trade

Hog trade

Live hog imports are projected to increase through 2010 but total numbers remain well under 5,000 head. Live swine imports increased 33 per cent during the January to June period of 2009 to 1,403 head.

Fewer hogs on Canadian farms are expected to result in lower exports of live hogs to the United States in though 2009 and continuing into 2010. Based on January to June 2009 data, post estimates that Canadian live hog exports to the United States may fall nearly 40 per cent during 2009 translating into a one year decline of over 3.0 million head. Reasons for the sudden decline live hog exports to the US market include a relative price increase due to the strength of the Canadian dollar, relatively low hog and pork prices in the United States, record US pork stocks, and changes in labeling requirements.

Pork imports

Canadian pork imports are projected to follow the longer term trend and increase to 200,000 MT in 2010 with a strengthening Canadian dollar and higher demand for high quality fresh cuts from the United States. Pork imports have declined nearly 9 per cent during the January – June period of 2009 due to overall weaker demand for pork and continuing strong domestic slaughter numbers resulting in growing domestic supply but are expected to rebound in 2010.

Following a strong 14 per cent increase in 2008, US pork sales to Canada during the first six months of 2009 have declined over 10 per cent. Canadian pork imports had increased in recent years reflecting the appreciation of the Canadian dollar and demand for US fresh or chilled pork cuts, including back ribs and for US prepared pork including pre-packaged sausages. Reportedly sourcing practices by big box stores such as Costco has also pulled US pork into Canada. Nearly three-quarters of pork imported from the United States was destined for Ontario in CY2008.

Total Canadian pork imports in 2008 reached 194,494 MT (CWE), 13.7 per cent above the year earlier level of 170,984 MT. Minor suppliers include Denmark, Chile, and Italy.

Pork exports

Canadian pork exports are expected to remain stable in 2010 at about 1.13 MMT with expanded non-US opportunities in overseas growth markets spurred by lower prices but restricted by an increase in the value of the Canadian dollar. Total pork exports from Canada have nearly doubled over the last 10 years with the opening of new markets and increasing export volumes namely to Japan, South Korea and Hong Kong. Newer growth markets include Australia and Taiwan, with exports of Canadian pork to those markets having increased 49 per cent and 23 per cent respectively during the first six months of 2009 as compared to the same period one year earlier. Working to support increased exports are the low prices, reopening of the Russian market and overall economic recovery.

Continued weak US demand for imported pork will pressure Canadian pork exporters to continue increasing sales overseas in order to maintain total exports at the 2008 level. Over the first six months of 2009 exports to the United States increased 2 per cent from the same period one year earlier. Exports to South Korea increased 9.1 per cent while shipments to Russia over the six month period have declined over 17 per cent due in part to a short term ban on certain pork products from Quebec and Ontario related to the H1N1 flu. On 17 July 2009, the GOC announced that Russia had agreed to lift all remaining restrictions on pork products which should result in increased exports.

Total CY2008 exports increased 9.2 per cent to reach a record 1,128,619 MT CWE. Much of the increase was due to a 65 per cent increase in exports to Russia, to reach 109,838 MT prior to the placement of recent restrictions and a 568 per cent increase in shipments to Hong Kong which reached a level of 45,259 MT.

Policy

Country of Origin Labelling (COOL)

Canada initially requested World Trade Organization (WTO) dispute settlement consultations with the United States on COOL in December 2008, arguing the measures were creating undue trade restrictions, to the detriment of Canadian cattle and hog exporters. At that time the interim rule was in effect.

The final rule to implement COOL was published in the US Federal Register on 15 January 2009. On 20 February 2009, the US Secretary of Agriculture issued an open letter to the US industry, encouraging the use of stricter and broader labeling practices. According to Canadian industry, the rule and proposed requirements will only add to the challenges they are already experiencing. They have observed that some US processors are choosing not to buy Canadian animals, or are buying at reduced prices. Prior to the COOL many hog operations were integrated across the boarder with weanlings exported from Canada to be fed in the United States.

On 7 May 2009, the Government of Canada requested further consultations on COOL which were held in June. As of the end of August 2009 Canada has not taken the next step of requesting a WTO dispute resolution panel in the WTO dispute settlement process.

Response to hog industry financial crisis

With the industry still struggling in 2009, the Canadian Pork Council (CPC) submitted a proposal to GOC for $800-million per year in aid with low prices and still-restrictive export markets due to H1N1. There within, farmers had requested loans equivalent to $30 per hog or the approximate difference between costs and revenue per animal. According to CPC, as a result of a relatively strong Canadian dollar, high feed costs and consumer perceptions about H1N1 which reduce demand, Canada’s hog industry is losing approximately C$3.4 million per day.

In response to the CPC proposal, on 15 August 2009 GOC announced a C$92 million restructuring plan which will aim to invest in marketing activities to create increased export demand for Canadian pork, provide longer term commercial credit to assist viable operations through the industry crisis and assist struggling operations to transition out of the industry.

Under the restructuring program, marketing activities will be concentrated on international markets with C$17 million over four years from market research, promotion and access initiatives to find/expand new markets for Canadian pork. The government’s partner for this component will be Canadian Pork International which is charged with developing proposals and assuring industry matching funds. Long term commercial loans at market rates will be offered to viable operations for restructuring. For this component the GOC will work with commercial lending companies. Under the third component of the program C$75 million will be allotted for a transition program under which producers will tender bids for the amount of funding needed to cease hog production for at least three years. The Canadian Pork Council is to work with the government to develop this part of the program. The actual specifications/requirements/approvals of the program are to be developed over a few months after the August 2009 announcement. Available details and future updates are available from the Agriculture and Agri-Food Canada (AAFC) website.

The program follows the sow cull program begun in early 2008. The goal of the C$50 million program was to reduce sow numbers by 10 per cent. Indications are that the program succeeded in culling approximately 7-8 per cent of the swine breeding herd by the fall of 2008.

According to the CPC, the path to successfully restructuring the hog industry requires increased disappearance of Canadian pork totaling 730,000 tons, an increase of 150,000 tons over 2008; exports of 4 million live hogs to the United States or 5.3 million fewer than 2008; total pork exports of one million tons, 20 per cent of which will be to the United States; total domestic slaughter of 21.5 million head, 0.2 million fewer than 2008; a reduction in total production from 31 million in 2008 to 25.5 million pigs; and an increase of domestic market share to 88 per cent compared to 75 per cent in 2008.

Further Reading

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February 2010