Canada: Hog Markets

CANADA - Despite the variability and price spikes in March and July, which sent both cash hog prices and pork cutout values to all-time highs, prices end the year close to where they started, writes Bob Fraser – Sales & Service, Genesus Ontario.
calendar icon 8 January 2015
clock icon 6 minute read

Like the preamble to an old joke "I have good news and I have bad news. Which to you want first?" Well let’s start with a quick review of where we have been. Thanks to Bert Caputo CFA, Investment Advisor - The Simpson/Caputo Group - RBC Dominion Securities Inc. for this nice summary of the markets.

Pork Cutout

High for the year was July 17, 2014 at $137.09
Low for the year was January 2, 2014 at $82.79
Most recent quote as of December 30, 2014 was $86.73.

  • Price range for the cutout was $54.30
  • Current cutout is $3.94 higher compared to the start of the year

CME Lean Hog Index

High for the year was July 16 at $134.17
Low for the year (so far) was December 29, 2014 at $78.56
Cash hogs as measured by the CME Lean Hog Index started the year at $80.07 on `1 January, 2014, $1.51 higher than current prices.

So at the start of 2015 we are right back to where we started 2014. Although 2014 will be emblasoned in the minds of farmers in Canada (and North America) for a very long time as what Jim has called "The Year of the Pig Farmer."

It particularly for Canada was a very long time in coming with the better part of a decade with this business not having a lot to recommend it. However, with a good portion of the past year supporting margins that could not even be dreamed of most producers in Canada have come a long way in getting healed up and backfilled the "equity hole."

Of course this leads to the inevitable question of "where to for here?"

My experience has been pork producers and certainly the successful ones do not spend a lot of time looking back. They are by nature a forward-looking group. That being said their recent experiences have caused them to be very wary of when the other shoe will drop.

So like Wile E. Coyote of Looney Tunes fame although they hope the Acme anvil is going to fall on the Roadrunner’s head, they somewhat suspect it may fall on their head!

The bad news, how the anvil might fall. Although being in the trenches we can not pick up any perceptible signs of expansion in Canada, it appears and now supported by the December Hog and Pig Report to be gaining steam in the United States.

As every Canadian pork producer well understands our wagon is very much attached to our American pork producer friends particularly when it comes to the price of hogs.

Then as has been noted in several recent commentaries if the sun and the moon and stars align such that the US expansion aligns with if not a disappearance but significant reduction in PEDv, coupled with a return to more normal productivity gains we could fairly suddenly see significantly more slaughter hogs.

The normal upshot of that scenario has tended to not be pretty. This coupled with the issues of shackle space in Canada (I discussed in my last commentary) could very much be a double-edged sword.

I believe this has been perhaps the main governor on expansion in Canada. It would be nice to suggest the reason for our lack of expansion is greater discipline and foresight. However, the reasons appear to be twofold.

One the Canadian industry due to host of factors was more beat up in the last ten years, suffering considerably great losses. Therefore, they have taken longer to heal up. This coupled with the significant question of where you’re going to get your extra hogs slaughtered is more than ample reason for caution within the Canadian industry.

Traditionally shipment of market hogs and particularly SEWs and feeder pigs to the US have been a viable option to Canadian producers. This has been greatly befuddled by COOL and although we are constantly told, "we are winning on this", "we have won" etc. appears to still be a slow boat to build plans on.

Well, enough of the possible bad news. I suggested I also had good news. By that I mean some possible offsets to more hogs in North America. One is the old standby in agriculture where one’s fortune requires someone else’s misfortune.

This could play from what Jim has discussed in a couple of his commentaries PEDv breaking out of Ukraine and becoming a significant factor to production in the EU. Further the contracted Chinese sow herd should be helpful to exports.

This coupled with an ever-depreciating Canadian dollar makes us "smarter." Also where you sit with alternatives can be a significant factor to price. To me the graph below may spell one of the greatest opportunities for pork production.

With beef price increasingly moving it into the luxury item class and the smallest cowherd in living memory will beef ever regain its preeminence in North America? Is there a real opportunity for pork to become the meat protein of choice in North America? Is any of the pork industry leadership even thinking about it?

One place to start might be a drive on pork quality. Canada has long had that focus for Japanese markets but it never has seemed to particularly translate to our domestic markets. Perhaps our quick gain on that front might be a move to a slightly lower carcass weight?

There certainly would be a gain to price (or at least an offset to more hogs) with less total pounds of pork but also a probable boost to meat quality. Unlike Genesus’s genetic programme there are numerous genotypes out there not geared to a heavier hog or with any consideration of its bearing on meat quality.

Finally perhaps the best good news is we live in one of the greatest democracies in the world with the pillars of peace, freedom and the rule of law. This is no small thing and something we should be truly thankful for as we scan the globe considering other places you could be doing business in.

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Charlotte Rowney

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