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Pork Commentary: Canada's Sow Cull and the Misplaced Promotion of Ethanol Production

by 5m Editor
7 March 2008, at 10:01am

CANADA - There has, and will be, liquidation in Canada, says Jim Long. In the time the United States increased their breeding herd by 150,000 sows, Canada declined 85,000 sows and we expect that Canada's industry will decline further.

However, we do not see this program as an initiator of extraordinary liquidation. The government of Canada announced a sow cull program last week.

The program:

  • Has a $50 million budget
  • Will pay $225 plus costs of slaughter and disposal per sow or boar slaughtered
  • Requires producers to empty at least one complete barn and agree not to re-stock that barn for three years
  • States that sows and boars culled since Nov.1 will receive $225 less the actual sale proceeds, provided that the farm meets the other requirements of the program
Another requirement is that the animals must not enter the human food chain. They may be rendered for pet food or other purposes or disposed of on-farm in compliance with regional environmental standards.

Our Observations:

  • $50 million divided by $225 per sow would be approximately 220,000 sows or about 15% of the Canadian breeding herd.
  • In the last three years, Statistics Canada indicates there has been an 85,000-head breeding herd decline in Canada.
  • We are of the opinion that $225 per sow is not going to change many producers’ thoughts on staying in the business or exiting. It could give banks a bigger hammer to force liquidation to cover their security. The net effect of the program will be negligible, since $225 per sow is no exit strategy windfall. If you have a large investment in capital facilities, the rendering of the three-year compliance not to restock eliminates almost all value on barns for resale and security.
  • We do not expect the program to lead to extraordinary liquidation initiated by producers. It will encourage bankers possibly to initiate but if they have facilities security, the three-year “no re-stocking” rule will destroy barn value. Actually, the three-year rule could be used by desperate producers to keep long-term capital leaders more cooperative in these tough times.

Summary

There has and will be liquidation in Canada. In the time the United States increased their breeding herd by 150,000 sows, Canada declined 85,000 sows. We expect Canada will decline further but we do not see this program as an initiator of extraordinary liquidation.

Much of Canada’s production is owner-operated. It is an integrated industry with many producers growing their own feed. This has helped them withstand the large increase in feed prices. Also, some parts of Canada have cheaper feed than the United States. Last week, Ontario corn was 80¢ a bushel under March (no corn ethanol subsidies – decrease in livestock). The U.S. national average was about 27¢ a bushel under March. Also, do not underestimate the pride of ownership of people raising their own hogs on their own farm. These are strong people who will not quit easily.

We expect Canada will decrease a further 50,000 – 75,000 sows. It would be, in our opinion, wrong for U.S. producers to listen to the commentators that are expecting liquidation in Canada to solve our industry’s supply challenge. We continue to expect liquidation in Canada and the United States combined to reach 150,000 to 250,000 before the dust settles. 2008 will be a year to survive. We expect 2009 will have extremely high prices, but the price of feed in 2009 is the wild card.

Other Items

  • Last Thursday, President Bush said at a press conference, “If you look at what’s happened in the corn out there, you’re beginning to see the food issue and the energy issue collide. The best way to deal with (renewable fuels) is to focus on research and development that will enable us to use other raw materials (than corn) to produce ethanol.”
  • Dick Bond, President-CEO of Tyson at the National Meats Association Annual Convention singled out what he called the ‘almost criminal’ government mandates supporting ethanol production.

The corn-ethanol battle is being engaged. We expect to see continued inflation and it will become an issue. It affects everyone. Corn ethanol can and will be the scapegoat. Environmentalists are losing enthusiasm for grain ethanol because of water usage, etc. The simple arithmetic points to a few grain farmers versus 99% of the electorate. This issue will go the way of the dot.com and housing bubble. The Chinese are and were right to bar grain usage for ethanol. It’s just a matter of time that the same will happen here.

Feed costs are hammering all livestock producers and threaten many producers’ livelihood. It is the biggest challenge we all face. Elimination of subsidies and tariffs that support corn ethanol would be a huge benefit for our industry. Consumers are our allies in this battle. In turn, we expect politicians will pander to them in this election year. As we go forward, tying high food prices to the ‘burning our food for fuel insanity’ is good for the livestock industry prospectus.

5m Editor