Report Highlights

Reflecting the ongoing cost-price squeeze and weak returns, Canadian red meat production is forecast to fall by an estimated 1.5% in 2008 and an additional drop of 3.0% is forecast by the end of 2009. Cattle and hog inventories showed significant declines of 4.3% and 11.6% respectively at mid-2008 compared to a year earlier. A cost-price squeeze has adversely impacted the profitability of livestock production and about one in twelve cattle producers and one in five pig producers have exited the business. These developments point not only to lower red meat production through 2009 but also to lower exports of live cattle and hogs to the United States. Total Canadian pork exports remain steady but Canadian beef exports are struggling to recover to a pre-BSE level. Ironically, red meat imports from the United States are increasing at a record pace reflecting a strong Canadian dollar and high demand among the Canadian retail and foodservice industries for U.S. red meats.

Executive Summary

The hog industry continues its transition. The cost-price squeeze in the Canadian hog industry that has worsened over the past two years has resulted in a near record hog inventory drop and a dramatic loss in the number of hog farms in Canada. According to Statistics Canada, total Canadian hog numbers in 2008 showed the sharpest inventory decline in three decades while almost one in five hog farmers exited the industry in the past year alone. The policy response by the Government of Canada (GOC) to the distressed hog industry includes provision of cash advances to cushion cash flow issues of the producers as well as a sow cull incentive program. By mid-July 2008, the sow herd had been culled by 7% thus approaching the ultimate goal of a 10% reduction.

Ironically, as financial hardship impacts Canadian cattle and hog producers, the stronger Canadian dollar has attracted increased imports of U.S. red meats by Canada’s retail and foodservice sectors.

USDA's interim final rule for Mandatory Country of Origin Labeling (COOL) is scheduled to come into effect on September 30, 2008. The initial reaction of Canada’s cattle and hog industries is that the flexibility of the COOL label categories will make the measure less onerous than initially perceived. Martin Rice, Executive Director of the Canadian Pork Council recently said, "As a result of the changes the made to the U.S. farm bill this year the record keeping requirements are much less onerous than what would have been the case under the 2002 farm bill.” In addition, recent reports that a coalition of U.S. livestock industry organizations has developed a unified approach to COOL compliance has encouraged Canada’s livestock industries. North American meat industry news services recently reported that 30 U.S. meat industry groups met and agreed on universal language (on COOL documents required) to facilitate how livestock origin documentation will move along the ownership chain in order to ensure that the meat covered by COOL is accurately labeled at the retail level.

The GOC official comments on COOL indicate several concerns including the possibility that the new rules may disadvantage imported product. The GOC indicated they perceive a lack of clarity in the display/segregation requirements at the retail level. The GOC will monitor closely and consider all options if COOL adversely impacts Canada.

Hogs and Pork

Summary

The cost-price squeeze in the Canadian hog industry that has worsened over the past two years has resulted in a record hog inventory drop and a dramatic loss in the number of hog farms in Canada. Weak market prices and high feed costs have resulted in low profit margins which are driving producers out of hog production. According to Statistics Canada, the Canadian hog industry continued its transition during the first half of 2008 and farmers reported 13.0 million hogs on their farms as of July 1, 2008, down 11.6% from one year ago. At the same time, the agency reported that nearly 20% of hog farmers had left the industry in the past year alone, or about 2,000 producers. Fewer hogs on Canadian farms will result in lower exports of live hogs to the United States. Post estimates that Canadian live hog exports to the United States will fall more than 10% during 2008 and reach about 9.0 million head, almost 1.0 million head below last year’s level. The continuing decline is the Canadian swine inventory into 2009 is expected to reduce total live hog exports to the United States by about an additional 1.0 million head to approximately 8.0 million head next year.

Hog Inventory Decline; Exodus of Producers

In the late 1990’s, Canada’s hog industry began a long run of inventory increases reflecting strong overseas demand for Canadian pork, aided by a low valued Canadian dollar, and strong U.S. demand for live swine and pork from Canada. The developments drove Canadian hog producers into an extended expansion phase that lasted ten years. However, by early 2006, an unprecedented rise in the Canadian dollar, linked to Canada’s strong position in commodity and resource markets (i.e., energy) hampered the competitiveness of Canadian pork exports in world markets. As a result, hog market prices were under pressure as pork packers reacted to the realities of the higher Canadian dollar. In addition, increasing U.S. hog inventories dampened U.S. demand for Canadian pork. By 2007, rising feed costs, related to the increased demand for corn for biofuels in North America and the increasing international demand for feed grains exacerbated declining market prices for slaughter hogs. Canadian hog industry leaders claimed it was the worst financial crisis the industry had witnessed.

According to Statistics Canada, Canadian hog farmers reported 13.0 million hogs on their farms as of July 1, 2008, down 11.6% from one year ago. At the same time, the agency reported that nearly 20% of hog farmers had left the industry in the past year alone.

Supply and Distribution: Hogs and Pork

Consumption

Per Capita Consumption

According to Statistics Canada, per capita pork consumption climbed to 24.68 kg, up more than 5% from the year earlier level but well below the record level of 30.09 kg during 1999. Among meats consumed in Canada, pork is the only meat to have registered a significant decline in per capita consumption during the past ten years. Some of the factors behind declining pork consumption during that period include 1) Strong retail prices during a period when BSE-related issues boosted Canadian beef supplies, 2) Consumer perception that the preparation of pork based meals at home is lengthy compared to other meats and; 3) pork’s inability to capitalize on foodservice market gains shared by other meats and fish. For 2008, reduced domestic supplies of pork are forecast and per capita pork consumption may decline following an outbreak of listeria monocytogenes on a national level in August 2008 that is expected to, at least temporarily, adversely impact the retail and institutional market for all deli-meats, many of which are manufactured from pork.

Hog Market Prices

The table below illustrates the extent of the hog market price collapse during the last half of 2007 that led to severe financial losses and the decision by one out of every five Canadian hog farmers to exit the industry. The market price decline coincided with rapidly rising input costs for feed and energy during the same period. Prospects for higher U.S. pork supplies in the last half of 2008 are expected to exert further downward pressure on Canadian hog prices as the year progresses.

Trade

Pork Imports

Total Canadian pork imports in 2007 reached 170,962 MT (CWE), almost 18% above the year earlier level of 145,264 MT. More than 96% of Canadian pork imports are from the United States. Minor suppliers include Chile, Italy and Denmark.

U.S. Pork Sales to Canada Surge

Continuing their recent trend, U.S. pork sales to Canada soared 27% during the first six months of 2008 to reach 88,575 MT (CWE) double their rate of five years earlier. Canadian pork imports have increased in recent years reflecting the appreciation of the Canadian dollar and demand for U.S. fresh or chilled pork cuts, including back ribs and for U.S. prepared pork including pre-packaged sausages. More than 80% of pork imported from the United States is destined for Ontario and British Columbia. For 2009, demand for U.S. pork in Canada is expected to increase moderately reflecting the outlook for lower Canadian pork production and prospects for a relatively strong Canadian dollar.

Pork Exports

Canadian pork exports during the first half of 2008 rose 4% above the corresponding period one year earlier on the strength of increased exports to Hong Kong, the Philippines, Russia, Taiwan and other smaller markets. Canadian pork exports to the United States fell 21% in the January-June period of 2008 reflecting plentiful U.S. supplies and the relatively high vale of the Canadian dollar. For 2009, continued weak U.S. demand for imported pork will pressure Canadian pork exporters to increase their offshore sales in order to maintain total exports at the 2008 level.

USDA's interim final rule for Mandatory Country of Origin Labeling, is scheduled to come into effect on September 30, 2008. Similar to Canada’s beef industry, the Canadian pork industry’s initial reaction is that the flexibility of the COOL label categories may make the measure less onerous than initially perceived. Martin Rice, Executive Director of the Canadian Pork Council recently said, "As a result of changes the made to the U.S. farm bill this year the record keeping requirements are much less onerous than what would have been the case under the 2002 farm bill. And there certainly is much more accommodation of existing market chains or value chains." In addition, recent reports that a coalition of U.S. livestock industry organizations has developed a unified approach to COOL compliance has encouraged Canada’s livestock industries. The media recently reported that U.S. meat industry groups met and agreed on universal language (on the documents required) to move livestock origin claims along the ownership chain in order to ensure that the meat covered by COOL is accurately labeled at the retail level.

Policy

GOC Response to Hog Industry Financial Crisis

In March 2008, the government of Canada responded to calls from the livestock industry for financial assistance by amending the Agricultural Marketing Products Act (AMPA) to give Canadian producers better access to cash advances. Changes to the Advance Payments Program (APP) through the amendments to AMPA now provide Canadian producers access up to C$400,000 (up to C$100,000 interest-free) in repayable advances. Cash advances under the APP are designed help producers with cash flow by giving them the flexibility to keep their products and sell them when market conditions are more favorable. According to Agriculture and Agri-Food Canada (AAFC), producers will potentially have access to C$3.3 billion in repayable advances if all livestock producers take full advantage of the program. AAFC also announced a new C$50 million initiative with the Canadian Pork Council to deliver a sow cull program designed to will help restructure the industry to bring it more in line with market realities including a goal to reduce the sow herd by 10 percent (see CA8008). According to the Canadian Pork Council, approximately 7% of the swine breeding herd had been culled under the program as of mid-July 2008.

Further Reading

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Other Reports in this Series

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September 2008