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Confidence in Long Term Viability of Hog Industry

by 5m Editor
22 November 2008, at 8:08am

CANADA - Long term, Canada’s pork industry will be smaller but healthier and stable. That was the conclusion of the “Hot Topics“ panel at Saskatchewan Pork Industry Symposium 2008.

Symposium Examines Keys Pork Industry Issues

The annual event, held in Wednesday (November 19) in Saskatoon, brought together hog producers, processors, industry analysts and others to discuss wide ranging topics of interest to the pork value chain. This year’s Hot Topics Panel included Dan Klippenstein the President of Excel Playgreen Group, a Manitoba based hog production company; Gary Maksymetz, the executive vice president of Maple Leaf Consumer Foods; Florian Possberg, a director with Canada Pork International representing the Canadian Pork Council; and David Reimann, the vice-president of Informa Econommics.

The session was moderated by well known Saskatchewan agricultural journalist and broadcaster Kevin Hirsh, with Hirsh Communications.

Canadian Producers Face Continued Losses

According to some estimates, over the past 18 months, negative margins in Saskatchewan have ranged from break even to $50 per head.

“Almost broke,“ is how Klippenstein candidly describes his current economic situation.

“I looked at pricing over the last few years and in Manitoba prices decreased from 2004 to 2005 to 2006 to 2007 to 2008 so far and grain prices were double at least so it has been unbelievable,“ he explains.

Possberg who has been producing hogs since 1975 agrees.

“Over that time we’ve seen ups and downs but there’s no question, this period since about the middle of 2007 has been beyond belief.“

He lists, as factors, everything from high feed costs to labour shortages to low prices to the spike of the Canadian dollar last fall. Then, just when things we’re starting to improve, the economic crisis hits and disrupts export markets.

Improvement Expected by Mid-2009

Reimann admits nothing is 100 percent but he is, “reasonably confident,“ that we’ll see improvement by the middle half 2009.

“Assuming that the economy doesn’t go into a total free fall, I think, that we should see a little more stability, simply because the industry has done some pretty serious contracting here in the last 12 months and continues to do so.“

He also predicts, because of the more severe cutbacks on the Canadian production side, that the recovery will be a little more dramatic in Canada.

“It usually takes at least six to nine months for any of those moves to start to show up in markets so the middle of next year does look a little more promising,“ he explains.

He believes when something is broken what is key is, “How fast are you fixing it?“

He observes, as was the case with BSE on the cattle side, “Canadians over the last few years seem to be reacting faster. I think ultimately that is a good thing because, in the long run, if we go on the faith that the economies in China, India and such are still on a growth phase, there is some light at the end of this tunnel. Regardless of how ugly things get here in the short term, looking forward down the road a couple years there is some reason to be optimistic.“

Outlook Better Now than One Year Ago

Maksymetz suggests, when you consider the fundamentals that would drive profitability, including exchange rate, input cost, market supply and demand, export markets, the current trend line would suggest we’re in a better place now than we were probably a year ago.

“There’s been market contraction in North America so that bodes well. Export demand will continue and I think everyone’s doing what they need to do to get their costs where they need to be.“

U.S. Labelling Law Creates Added Uncertainty

One of the biggest unknowns, at this point, is what impact new U.S. Mandatory Country of Origin Labelling (M-COOL or COOL) will have on the Canadian pork industry. The new rules, which came into effect September 30, require fresh pork destined for retail to be identified according to its country of origin. Four labels identify; A, pork from animals raised and slaughtered in the U.S.; B, pork from animals raised partially in the U.S. and Canada and slaughtered in the U.S.; C, pork from animals raised in Canada and imported for direct U.S. slaughter; and D, pork from animals raised and slaughtered in another country.

As a result of the new rules several major U.S. processors have decided they will no longer handle Canadian origin swine and others have not yet committed one way or the other.

According to discussions he has said, Klippenstein says Tyson is going to be killing Canadian origin pigs. Cargill, Morrell and Swift will not. Hormel doesn’t know yet. He adds, representatives of Tyson have indicated they still have no orders for B category pork, (pork from animals raised in Canada and the U.S.) so they don’t know if they can sell it even if they are interested in killing Canadian origin pigs.

Weanling Producers Face Greatest Risk

Klippenstein is confident the farrow to finish operations will largely survive in Manitoba, especially if they’ve got Canadian markets.

But he fears, if the U.S. plants won’t kill Canadian origin pigs or will kill them but at a significant discount, that Manitoba’s isoweans and weanling producers will be gone.

Pork Market Expected to Provide Solution

Possberg is optimistic the market will provide the solution.

He concedes the U.S. could still impose even more damming rules as part of the COOL process. However, despite some hawkish remarks made by the new administration, he is confident that at the end of the day common sense will prevail.

He estimates there are four million Canadian origin pigs in barns in the U.S. that have to go to slaughter.

“There’s Canadian pigs that are going to be slaughtered. They’re not going to go to a rendering plant. Somebody is going to buy. If the Canadian hogs become discounted somebody is going to pretty quickly see that there’s a marketing opportunity to either keep a plant full or to become a supplier with a price advantage because the raw product will be discounted.“

“I’m pretty confident that the market is going to sort this out,“ he says. “The problem is how much blood is going to be on the floor to get from here to there.“

Economics Expected to Sway Decisions

Maksymetz agrees, “We’re in the phase of confusion and assessment of the market. I think, ultimately economics will come into play and the astute packers in the U.S. will find a way to take advantage of the current state.“

He notes COOL applies only to the retail market in the U.S. so food service and industrial channels don’t require it.

He believes, “At some point we’ll get to a normalcy and there will be a flow of pigs from Canada into the U.S. It’s just when will that be and what’s the cost to get there, is the unknown.“

Five Year Outlook Considered Positive

Reimann believes five years from now the Canadian industry will be smaller but much healthier and reasonably stable.

Klippenstein also expects the industry to be a little smaller and he expects a lot to depend on exchange rates.

“We can’t compete on a one to one exchange rate. If the exchange rates stay at that $0.80 range, that makes us much more competitive with the U.S.“

Maksymetz believes the industry needs need to focus on getting costs out to compete with the large producers in the U.S. and to differentiate. He observes the industry has made great strides in that direction. He notes Maple is committed to process all of its pork requirements for Canada at Brandon, drawing on supply from Saskatchewan Manitoba.

“You can count on the fact that we’re going to need 86,000 hogs a week for the foreseeable future so I think as an industry the future is brighter,“ he says.

Fundamental Canadian Advantages Still Key

Possberg stresses, while the economics are different, the fundamentals that were cause for so much optimism three to five years ago, the space we have, the abundant supplies of feed grains, the established infrastructure such as roads have not changed.

He observes, it’s when times are tough that opportunities are created and he believes the industry will bounce back and be O.K.

“When we compare what we can do to the people in the livestock dense regions in the world like China, for heaven’s sakes, why wouldn’t we be producing pork in Saskatchewan rather than three miles out of Shanghais?“