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Pork Commentary: Canadian Market Hog Inventory Down, Exchange Rate Challanges!

by 5m Editor
21 August 2006, at 11:46am

CANADA - This weeks North American Pork Commentary from Jim Long.

For the last few months we have taken the position that there was no expansion in Canada and that in that our opinion Canada would have fewer pigs in inventory. Last week Statistics Canada released Canada’s Pig Inventories. The year over year market inventory had declined 3.1%.

July 1st Canadian Pig Inventories per Thousand Head
Breeding herd
per thousand head
Market inventory
per thousand head
2005 2006 2005 2006
Canada - July 1st 1,648 1,642 3,292 12,842
USA - June 1st 5,977 6,060 54,754 54,867
TOTAL USA+Can 7,625 7,702 68,046 67,709

A static breeding herd inventory. A market hog inventory 400,000 head less than a year ago. There are several reasons for the market hog decline and lack of breeding herd expansion, Canadian dollar appreciation, circovirus, more small pigs being sent to the USA, increased building costs, etc. Bottom-line: too many factors either increasing the cost of production or decreasing profitability.

These factors all contribute to the relative profit advantage to produce swine in the United States. The lower hog numbers in Canada are price supportive for producers through out North America.

If we look at the combined Canada July inventory and US June 1st inventory we get a good snapshot of potential US-Canada production.

2005 2006
Breeding Inventory 1,648 1,642
Market 13,292 12,842

A 1% increase in the Canada USA breeding herd; a market inventory 250,000 head smaller than the previous year. When you have fewer hogs in inventory and increased packer capacity is it any wonder we have US hog prices over .50¢ per pound live weight. We have taken the position for a year there has been no continental increase in hogs and that is why prices would remain profitable. A 1% increase in the combined Canada US breeding herd inventory will do little to overwhelm US packer capacity that has expanded over 5% this past year. Hog price prospects for the next twelve months remain positive. We have October hog futures at $66.32 on last Fridays close and next June at $68.15. Feed prices should remain low. Good profits are in the cards for the next year.

Canada

Canada’s pork industry faces several challenges. Two weeks ago Michael McCain, President and Chief Executive of Maple Leaf Foods Inc. which is Canada’s largest hog producer and meat processor spoke to several 100 producers and suppliers about the state of Canada’s swine industry. Some excerpts of McCain’s speech.

"The number of hogs marketed in Canada has increased 77% in the last 10 years"

"Canada is one of the top three exporters of pork in the world, with the USA and Denmark"

"We have a litter size and performance advantage with an average of 20 pigs per sow compared to 17.4 in the US." "Canada has been much faster than the USA in adopting formalized genetic improvement programs. The process of selective breeding improves traits such as lean yield and feed conversion of around 1-2% per year which has contributed greatly to the superiority of Canada pigs"

"Fighting For Our Lives"

Direct quote Michael McCain, President and Chief Executive of Maple Leaf Foods Inc.

"Yet, in spite of all this leadership by thousands of men and women, the greatness of their accomplishments and the capital commitments that have been made... we are facing an unprecedented challenge. The Canadian industry was built on a $0.65 dollar. Capital was put on the ground at that level, and operating structures were built at that level. The shift over the past three years from $0.65 to $0.90 (38%) – a shift no one forecasted – has extracted our competitive advantage on the world stage.

For hog producers, we calculate in our own operations that the loss in competitive cost advantage is $20.00 per hog. In 2003 currency, a live price per animal of $125.00 was considered a low point in the cycle... today, that same $125.00 is in fact the FIVE YEAR AVERAGE... yes, the projected five year average. Nothing has changed but currency!

It is no different in primary processing. We estimate that our loss in competitiveness in our primary processing plants, just from the impact on relative costs in the Canadian value – added components of labor, facility overhead and administration expenses, is $10.50 per hog.

Add this to the facts that 10 years ago, Canada had a feed cost advantage over the US estimated to be over $10.00 per animal. Fast forward that to today where, in fact, our feed cost is estimated to be worse off of $1.00 to $2.00 HIGHER than the Americans even in Canada’s best markets. This is driven by many factors, but we feel currency is a significant player in this as well…add this all up and we have a fundamental challenge for the entire Canadian industry that no one imagined.

Just to Maple Leaf alone, it represents a loss in competitiveness of roughly $100 million annually".


That was a to the point assessment of the challenges of the Canada Pork Industry by Michael McCain.

McCain went on to discuss the need for collaboration, scale, cost reduction and investment in productivity to deal with the current reality.

He talked about Maple Leaf’s own pork production system where he looks to re-engineer it’s business model. The need to look at weight gaps between Canadian Hogs versus US – as a substantial driver of cost reduction in both production and processing. The potential of the proper use of Paylean that has just been approved for use in Canada as a cost reducer. Last but not least the need to develop new markets for Canadian Pork, and expand domestic markets.

The McCain’s speech was hard hitting, no one likes to be reminded of a less than optimum business environment, but when the man speaks who head is up the corporation which has more money invested in the pork industry than any other entity in Canada it pays to take note. Unfortunately McCain’s assessment of the Canadian industry hits the mark. Without lowering costs and increasing prices, the Canadian pork industry will continue to shift finishing to the US to enhance profits and new sow buildings in Canada will be next to non-existent. Without change an industry treading water.

As an optimistic entrepreneur Michael McCain summed up his assessment of the future at the end of his speech.

"I have full confidence that the headwinds of currency will prove to be a transitory problem, and within a few years we will look back at this period as one where we took bold but necessary steps to regain our competitive advantage as an industry that is vital to Canada"

"Leaders do not avoid, repress, or deny conflict, but rather see it as an opportunity"


----- Warren Bennis

Written by Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 15th August 2006 - Reproduced courtesy Farms.com

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5m Editor