Introduction

From an international perspective, Canada's pork industry has done extremely well by expanding into new foreign markets such as Russia, South Korea, and Taiwan and increasing export tonnage from 266,000 tonnes in 1990 to 1,094,545 tonnes in 2008. With this expansion into foreign markets there have been many changes at the farm level with the movement from many small farms to fewer, larger, and more specialized farm businesses. Most farms have adopted some form of industrialization by taking advantage of the latest trends in production, environmental management, feeding systems, genetics, etc. In Ontario, the number of farms in the swine farm class of 1 to 77 animals decreased by 50.8 per cent between 1996 and 2006 while the swine farm class of 4,685 animals and over, increased by 245 per cent during this time period.

It is recognized that there are many factors that can affect the relative profitability of an industry, however some of the current ones facing Ontario producers include: low hog prices for an extended period of time caused mainly by excessive North American production; reduced global demand caused by the economic recession and the outbreak of the H1N1 virus; exchange rate fluctuations between Canada and United States (i.e. in 2008 the Canadian dollar was worth $US0.938 whereas in 2004 it was worth $US0.768); Country of Origin Labeling requirements by the US; and strong feed grain prices. The average market price for 2008 in Ontario was $126.55/ckg (i.e. index 100 hog) and the estimated loss on a farrow to finish farm was $39.31 per hog. Losses for the entire Ontario pig production industry in 2008 were calculated to be over $C250 million. This past year some Ontario producers took advantage of the Canadian Government program called the Cull Breeding Swine Program.

Given this backdrop of slumping pig prices, shifting profitability between Canada and the United States, the need to compete on the international stage, improved production technology, and industry consolidation it is not surprising that producers are wondering about alternative hog marketing systems. In particular, producers are interested in learning more about supply management and what some of the advantages and disadvantages of this marketing option are.

Supply Management

Supply management in its simplest form is an attempt to find the balance or equilibrium between supply and demand. It was first implemented in Canada in the early 1970's and was established to balance the power between producers and processors and to stabilize markets causing highly variable returns. Managing the supply of a commodity in agriculture is usually complex because of the large number of production units involved and the many uncontrollable factors such as the weather and foreign government policy. In Canada there are only 5 commodities that manage supply and they are: eggs, milk, turkey, chicken, and broiler hatching eggs (eggs from which chickens hatch).

The mechanics behind supply management is that the national marketing agency establishes annually the national requirement or demand. The national requirement is then shared amongst the provinces (i.e. normally based on historical production or population) and provincial boards issue production quotas to individual producers. Regulated marketing is overseen by the National Farm Products Council. As with most marketing structures, there are many advantages and disadvantages associated with supply management.

Below is a listing of the advantages and disadvantages normally associated with supply management.

Advantages:

• Commodity price is based off a cost of production formula which provides producers with a predictable cash flow and profit.
• Producers can receive a greater share of the retail sales dollar because of greater market clout.
• Able to control the domestic market through tariffs on imports.
• Removes the need for other government support payment schemes (e.g. CAIS/AgriStability).

Disadvantages:

• Supply management can shelter the inefficient and drive up the costs of efficient operators. It prevents the efficient producer from lowering their cost structure since output cannot be increased and overhead charges spread over more product.
• Has the ability to make some producers complacent since there is limited incentive to improve because a profit is built into the cost of production formula. This can cause some individuals to become less receptive to adopt new technology.
• Provides existing producers with an asset and forms a large barrier for young/new producers since they would have to raise the extra capital required to purchase the production quota.
• Producers have limited opportunity to expand since they are mainly relying on only the domestic market.
• There are often concerns raised about the lack of consumer responsiveness. For example consumers may want more loins than hams but because production is limited, only so many loins are available and the extra demand remains unfilled.

Background Information

Table 1 shows historical total pig production by province for the 2004 to 2008 time period. Ontario's production in 2008 was estimated at 7.1 million pigs. This is a decrease from 8.0 million pigs that were produced in 2004. Ontario's production is the third largest in Canada after Manitoba (10.2 million pigs) and Quebec (7.8 million pigs). Ontario's share of the total Canadian production in 2008 was about 23 per cent.

Figure 1 shows the number of sows and gilts over time for the five largest provinces in terms of pig production. All five provinces have seen declines since 2004. Ontario's sow and gilt inventory as of 1 July 2009 was 356,000. This is a decrease from its peak of 433,300 sows on 1 April 2004. Ontario's sow and gilt herd is the second largest in Canada after Quebec (382,000) and just ahead of Manitoba (330,500). Ontario's share of the total Canadian sow and gilt inventory on 1 July 2009 was about 26 per cent.

Figure 1 Number of Sows/Gilts Over Time
Graph: Statistics Canada

Figure 2 shows the human population by province as of 1 July 2008 compared with the total pig production by province for 2008. This is an interesting graph because it raises the issue of how pork production would be allocated across provinces under a national supply management program. The three largest provinces in terms of pig production are Manitoba (33 per cent of Canada), Quebec (26 per cent) and Ontario (23 per cent). However, in terms of population, the same three provinces have 4 per cent (Manitoba), 23 per cent (Quebec) and 39 per cent (Ontario) of the total Canadian population.

Figure 2 Human Population vs. Pig Production by Province, 2008
Graph: USDA, APHIS; AAFC, Red Meat Section; Statistics Canada

Another important variable to keep in mind is that pork available per person on a carcass basis in 2008 was 23.51 kg/person. Pork available per person is another term for per capita consumption. This is a decrease of 5 per cent from 2007's figure of 24.84 kg/person. The trend since 1999 has seen domestic pork consumption/person decreasing. 1999's figure was 30.09 kg/person so there has been a decrease of about 6.6 kg/person or 22 per cent from 1999 to 2008. Please note that these consumption values are only estimates and may not accurately reflect total carcass weight equivalent consumed.

Canadian Pork Production - 2008

From reviewing Table 2 it can be seen that in 2008 for Canada, the total number of pigs either slaughtered or exported live was 30,865,058. Notice that this production figure differs slightly from the one presented in Table 1 (i.e. 30,593,112). The reason for this difference in production is Table 1 includes live pig exports to the US only, whereas Table 2 has live pig exports to all countries. From the total production number in Table 2, 21,520,329 pigs were slaughtered in Canada (i.e. 69.7 per cent) while 9,344,729 were exported either as live hogs (i.e. 2,308,368) or feeder pigs (i.e. 7,036,361). Of the pigs slaughtered in Canada, net pork trade figures suggest that 10,006,191 hogs were exported as pork (i.e. based on net pork exports divided by an average carcass weight of 92 kg). This means the total amount of Canadian production exported as either live pigs or pork is 19,350,920 calculated as follows: live pig exports (9,344,729) + net pork exports converted to live pig equivalency (10,006,191). Therefore, at the national level the total amount of production that is exported is 62.7 per cent. This means that domestic consumption is only 11,514,138 pigs or 37.3 per cent of production. The implication at the national level is that there would have to be considerable downsizing if production was to meet only Canadian demand and there was no international trade.

Ontario Pork Production - 2008

To calculate Ontario pig production and the volume of pork exported outside of the country becomes a challenge because there is no data for either weaner pig flows or pork between provinces. However, as can be seen in Table 2, Ontario's estimated total production for 2008 was 7,060,638 animals. From this production figure, the total number of province of origin hogs slaughtered was 5,361,897 (i.e. 5,086,424 within Ontario and 275,473 within Quebec); and 1,698,741 exported to the US as either feeder pigs (i.e. 806,235) or market hogs (i.e. 892,506). Of the Ontario province of origin hogs slaughtered (i.e. 5,361,897), domestic consumption used 4,015,767 of these animals and net pork trade used 1,346,130 of these animals when converted to live hog equivalents. This means that the percentage of Ontario production exported is 43.1 per cent or 3,044,871 pigs (i.e. 1,346,130 net pork trade in hog equivalents plus 1,698,741 live animals).

Another method of estimating the level of provincial production allowed under a supply management system is to take total Canadian pork consumption or demand and allocate this figure based on historical pig production within each province. During the spring of 2009, Ontario only had 25.9 per cent of Canada's sow inventory (i.e. 352,500). If Ontario's share of Canadian consumption is based on the current sow inventory, Ontario would be allowed to produce 2,982,162 hogs (i.e. 11,514,138 x .259). Under this scenario, the reduction in Ontario production becomes 57.8 per cent. Again this amount of downsizing assumes no international trade of pork or live animals.

Supply Chain Implications

As it has been presented above, the movement to a supply management system would involve considerable downsizing of the existing Canadian swine herd. The implications of this downsizing to up-stream business partners would be far-reaching and in some cases could mean closure. Within Canada, there are several processing plants that specialize in exporting to foreign markets (e.g. Maple Leaf plant located in Lethbridge). Also, there are value-added further processing plants that market considerable volumes of pork product that would have to alter their business plans or shut-down. There are parts of the pig that are almost exclusively exported which could negatively impact the value of the whole cutout and therefore processor profitability if these products could no longer be exported.

Trade Implications

Currently, there are five supply managed commodities in Canada (dairy, turkey, egg, chicken and hatching egg) that are collectively known as the Supply Management Five (SM5). Canada and the SM5 are under intense international pressure to change or disband supply management. Canada has obligations under previous WTO and NAFTA trade agreements that will impact whether supply management could be implemented for pork in Canada. The ability to control imports is also an important component and would be difficult to achieve through the use of trade barriers (e.g. Tariffs) since current international trade agreements have the goal of lowering barriers over time.

Summary

Given the current situation that the Ontario pork industry finds itself in which is over three years of below break-even commodity prices, it is not surprising that producers are interested in alternative marketing systems. However, in order to implement a supply management system in the pork sector there would be many hurdles to overcome. Some of these stumbling blocks include: international trade issues and the development of a tariff system; the issue of producer downsizing to domestic consumption; how production would be allocated amongst provinces; and whether a quota system would be used to set production volumes.

At the Canadian level if all live pig and pork exports were ceased and producers only supplied domestic consumption, the Canadian industry would have to contract by 62.7 per cent. In Ontario the contraction based on filling provincial consumption would be 43.1 per cent which is less than the national figure because of the larger population base in the province. However, if Canadian consumption is allocated based on existing sow inventory figures rather than provincial consumption or demand, the reduction in Ontario production becomes 57.8 per cent.

Further Reading

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