Pork Commentary: Maple Leaf Foods Rock the Canadian Pork Industry

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

18 October 2006

7 minute read

North America

The Canadian Swine and Pork Industry was rocked at the end of last week by the announcement by Maple Leaf Foods that they were going to begin a massive 3 year restructuring.

Maple Leaf is currently one of Canada’s largest food and meat companies. Maple Leaf is Canada’s largest hog producer with approximately 110,000 sows. The company employs 24,000 people and had sales of $6.1 billion in 2005.

Planned restructuring includes closure of hog slaughter plants in Winnipeg and Saskatoon. There is intention to sell hog slaughter plants in Burlington, Ontario; Lethbridge, Alberta and Berswick, Nova Scotia. There is also a plan to double shift Maple Leaf’s most modern plant in Brandon, Manitoba.

Our Observations

Saskatoon and Winnipeg’s daily slaughter are about equal to what Brandon will do on a second daily shift. Closing both plants will lower slaughter costs by pushing efficiency at Brandon.Maple Leaf will not want to sell Winnipeg or Saskatoon to a competitor, as both plants are in the procurement range of Brandon and they need hogs for the second shift. The Lethbridge, Alberta and Berswick, Nova Scotia plants are relatively small plants and they do not fit the Maple Leaf’s new efficiency scale model. Other problems are the great difficulty and cost to secure labour in Alberta due to the booming oil and gas industry (eg. Alberta hog farmers are paying workers $20 an hour). The Nova Scotia plant has the added difficulty of procuring hogs from a geographical region of small scale and high costs. The same reason no one produces hogs in the New England states is the very same economic reason that there is no long term viability in Nova Scotia for hog production without artificial supports.
The Burlington, Ontario plant is of significant size, slaughtering about 40,000 a week on a single shift. Selling the plant as planned might be difficult. The fresh pork business with no brands is hard. With Canada’s other major pork company, Olymel announcing losses of $55 million this year and also restructuring, it’s hard to believe that they would be a Canadian buyer. Maybe a US packer, but we are not sure as retail shelf space would need to be acquired and/or lower slaughter costs for pork to flow into export markets. Burlington is a middle aged single shift plant with a strong union located in the high wage for Greater Ontario area. Not a recipe for a low cost commodity business.
It has been our opinion that one of the great strengths of the US swine industry has been the aggressiveness, efficiency and capital resources of the US packing industry. Seventeen of the top 20 US plants are double shifted. None of Maple Leaf’s 6 plants are currently. Maple Leaf realizes to have a new playing field with costs, they need to double shift Brandon. If not, it’s like running a 2,500 sow unit with 1,750 sows. Your overhead costs per unit produced eventually will drive you out of business.
Maple Leaf currently has 110,000 -125,000 sows. After restructuring they expect to have 50,000 to help supply the Brandon, Manitoba plant. Maple Leaf has currently approximately 25,000 sows in Ontario. We would not expect this production to continue under Maple Leaf ownership or contract. Maple Leaf wishes to own 100 percent of the 50,000 sows in production. Several joint venture or contractual arrangements will be discontinued in Manitoba. We estimate 30 – 40,000 sow in that area becoming independent or attaining other association
Maple Leaf owns several feed mills and is one of the major feed companies in Canada. If we understand Maple Leaf’s restructuring correctly, their intention is to retain feed mill capacity to only meet the needs of 50,000 sows. Other feed mills will be sold and Maple Leaf will no longer be in the retail feed business.
From what we can observe, Maple Leaf has the two most powerful brands in the Canadian pork industry, Maple Leaf and Schneiders. In the Canadian retail stores both brands receive premium value added prices. When Maple Leaf restructuring drops yearly hog slaughter from7 million to just over 4 million, 70 percent of it’s pork will be used for Maple Leaf’s value-added products up from 20 percent currently. It’s smart business by Maple Leaf to maximize profitability by enhancing branding while lowering overall risk and costs associated with both the domestic and international markets.
Michael McCain, President and CEO “We were in the fresh pork business for the purpose of selling fresh pork to the world. The architecture was predicated on having a globally competitive cost structure.“ The model worked when the Canadian Dollar was 65 to 70 cents to the US. Now at 90 cents, the extra costs associated with single shift plants have put Canadian fresh pork at a price disadvantage in the world markets. Canada’s dilemma is that it exports approximately 50% of its pork production and that it’s two big competitors the US and Brazil are both currently more competitive with the final product. Maple Leaf for all intents and purposes is abandoning export markets and the exposure to currency fluctuations to concentrate where they have the home field advantage of powerful brands and reliable shelf space in the Canadian domestic market.

Conclusion

Maple Leaf’s restructuring will push more pigs and hogs to the lower cost and more profitable US market. We expect another one million total per year – mostly small pigs. Many will have retained ownership
Slaughter capacity will not grow in Canada - if there are no buyers for some existing Maple Leaf Plants capacity will decline.
The challenge of a higher Canadian dollar is not only affecting Maple Leaf and Olymel. All Canadian hog producers have made $20+ per head over the last two years. Canadian producers have just been above break-even.
The Maple Leaf restructuring will make financing harder for hog producers in Canada, as the banks wait to see how the restructuring plays out in the marketplace.
There will be no expansion of hog production in Canada and we expect to see production declines.
The major relief for hog producers might come from currency devaluation. With some predicting 80 – 82 cents versus today’s 89 – 90 cents by the end of 2007.
The upshot is that economic pressures are pushing rationalization and efficiency upgrade throughout the Canadian industry. Survival is predicated on this realization. Independent producers weaning over 25 pigs are bulletproof. Many others have to push towards such levels. When the dust settles, the whole Canadian industry (packer and producer) will be leaner and more profitable. The technology, human resources are in place for this reality We like to believe the Canadian industry isn’t down but just reloading for the future.