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Commentary on Exchange Rate Impacts on Hog/Pork Competitiveness

by 5m Editor
2 December 2003, at 12:00am

By Kevin Grier, Senior Market Analyst, George Morris Centre - The purpose of this paper, prepared for the Canadian Pork Council, is to explain the economic reasons behind the increase in hog and pork exports from Canada to the United States during the third quarter of 2003. This comparatively large increase in hog exports has caused concern among US producers regarding the impact on US markets and prices. For their part, Canadian producers are also concerned about the reasons behind the increase and the repercussions for the Canadian market.

Commentary on Exchange Rate Impacts on Hog/Pork Competitiveness - By Kevin Grier, Senior Market Analyst, George Morris Centre - The purpose of this paper, prepared for the Canadian Pork Council, is to explain the economic reasons behind the increase in hog and pork exports from Canada to the United States during the third quarter of 2003. This comparatively large increase in hog exports has caused concern among US producers regarding the impact on US markets and prices. For their part, Canadian producers are also concerned about the reasons behind the increase and the repercussions for the Canadian market.

Executive Summary

The paper breaks down the export issue into both a long term and short-term perspective. This is necessary in order to differentiate between the “normal” export factors and those that might be unique to the current situation. It is also instructive or helpful to look at the long term or big picture factors in order to understand the underlying drivers of trade between the two regions of North America.

The following are the key summary points and conclusions:

Long Term Factors

  • The Canadian and US hog production and pork-packing sectors are two parts of one North American hog and pork industry.
  • Canadian slaughter hog exports have been gradually decreasing
  • Canadian feeder/weaner hog exports have been rapidly increasing
  • Canada has a competitive advantage in the production of weaner pigs
  • The US corn belt has a competitive advantage in finishing hogs
  • US hog finishers in Iowa and the Corn Belt have demonstrated strong demand for Canadian weaners.
  • Canadian herd growth has been driven by sows, not by market/slaughter hogs
  • The US hog price differential in favor of US producers has been declining over time.
  • Canadian slaughter and slaughter capacity has been rapidly accelerating and has more than kept pace with market hog production
  • Canadian slaughter has not kept pace with the growth of the weaner production sector in Canada and that is where the growth in exports has occurred.
  • Long term C$ depreciation favors weaner production and weaner exports.

Short Term, Summer 2003 Factors

  • Rapid appreciation of the Canadian dollar during 2003 has resulted in material revenue loss amounting to approximately C$20/head.
  • BSE has had a negative impact on Canadian consumer demand for pork.
  • BSE has likely cost Canadian packers about C$7/hog in lost revenue.
  • The Canadian packer margin differential relative to the US packer margin has declined significantly this summer. This summer Canadian margins were about C$4/head lower than normal compared to their US counterparts. Canadian packer buying power suffered by $4/hog relative to their US counterparts, which allowed US packers to outbid for the hogs.
  • Packer plant closures resulting from weaker margins and returns have contributed to the entire difference in slaughter market hog (barrow and gilts) exports this summer compared to last summer.
  • Larger than average slaughter sow and boar exports have occurred during the summer. This is signal of sow herd reduction in Canada.
The conclusion to be reached regarding long-term issues is that comparative advantage in weaner production in Canada and finishing in the US, coupled with exchange rate factors can explain a large measure of the growth in the Canadian herd. Those factors can also be held to explain the growth in weaner/feeder exports. The slaughter hog or finishing hog sector has not seen the same growth and is more in balance with slaughtering capacities in Canada.

With regard to the short term, the appreciation of the Canadian dollar in combination with the impact of the BSE crisis has had a negative impact on the Canadian hog production and packing sectors. These unusual circumstances have resulted in weaker returns for both packers and producers. This in turn has resulted in increased market hog exports as a result of reduced Canadian packer buying power and plant closures. The weaker returns for Canadian producers also means that they are undertaking a material culling of breeding stock. This has also resulted in increased breeding stock exports.

The impact of the BSE crisis is slowly abating as beef exports resume. This has eased pressure on Canadian pork markets. Furthermore, one of the two plants that closed this summer has reopened and is killing at a reduced rate. Packer margins have begun to seasonally improve this fall, which will result in increased kill rates, and less slaughter exports. Finally, the rapid culling of the Canadian herd will likely result in a reduction in exports later in 2004.

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Source: George Morris Centre - November 2003