Better Times Ahead For Hog Producers?

So far this year, Canadian producers have had their best period of profitability in the last five years, a relief for those who survived a four-year period of unprecedented hardship, with low hog prices and high feed costs.

With market hogs fetching up to $200 a head and sometimes more during the summer, the only cloud on the horizon has been high feed costs, which have eaten into margins. The upside is that, both in the U.S. and Canada, this seems to have curbed any plans for significant expansion. And with strong demand in the Far East for our pork exports, the mood in the industry is cautiously optimistic.

So after recovering from their economic battering, what should producers be doing to prosper in future and what challenges might they face?

In a world context, Canada is a low-cost producer, with fairly similar costs to the U.S. and only slightly higher than Brazil. Unfortunately, producers also receive the lowest prices in the world. This means that the focus in future has to be on lowering the cost of production, especially feed costs.

The incorporation of byproduct raw materials into diets can bring significant savings, as noted in my two recent articles on this topic. To get the best value out of more fibrous ingredients, it is essential to formulate diets on the basis of Net Energy and Standardized Ileal Digestible (SID) lysine, and get expert nutritional advice. It s also important to monitor growth and carcass performance accurately in order to be able to measure the effect of diet changes.

The volatility of grain and protein prices in recent years is likely to continue. In such an uncertain economic climate, producers should expect to see the sort of price swings we have seen over the past few months. This makes it all the more important to lock in to forward contract prices when they are relatively attractive. Our counterparts in the U.S. routinely do this and producers here need to embrace forward contracting for both feed and hogs much more enthusiastically in order to secure a margin.

One of the main factors that precipitated the industry crisis in 2007 was the rapid rise in the value of the Canadian dollar. Recent weakness added nearly 10 per cent to producer prices, a welcome bonus, although since then the loonie has recovered somewhat. Some economists predict the heady heights of $1.06 per U.S. dollar will not be seen again, but a sharp rise in oil and commodity prices could see it strengthen. Overall, it seems likely that producers will get some relief from a rather weaker Canadian dollar, which will increase the price they receive for hogs.

The weak U.S. dollar has led to a huge growth in exports over the last few years. In 2010, the U.S. exported 1.9 million tonnes of pork, up from about 1.2 million tonnes five years ago. Unfortunately, during the same period, U.S. pork exports to Canada rose to over 180,000 tonnes from roughly 130,000 tonnes. However, the U.S. has been very aggressive in its marketing and very successful at exporting pork from the North American continent, which has been supportive to hog prices. Three long-stalled free trade agreements, with South Korea, Panama, and Colombia, have just been ratified by Congress. Dermot Hayes, an economist at Iowa State University, estimated these free trade deals will increase U.S. pork exports by $770 million.

The agreement will phase out Korea s 20 per cent tariff on American pork over a 10-year period, giving it an advantage over Canadian exporters.

The Canadian Pork Council is pushing the government to act quickly to revive its free trade negotiations with Korea, says Martin Rice, CPC s executive director. Otherwise, our producers will be completely shut out of a market that represents 10 per cent of Canada s pork exports.

Another export opportunity will arise when the EU partial sow stall ban deadline is reached at the end of next year. The market for pork within the EU could descend into chaos and it is predicted that there will be a significant exodus from the industry. Although this will probably not mean that the EU will import more pork, it will export a lot less, allowing major exporters like the U.S. and Canada to take up the slack. Overall, the world situation, in terms of pork supply and demand looks quite supportive for prices over the next couple of years.

Having said that, the one negative factor is the steadily improving efficiency of U.S. producers, which is increasing pork production without any increase in the sow herd. The recent USDA Hogs and Pigs Report shows the average number of pigs weaned per litter has exceeded 10 for the first time, up from just nine in 2005. This two per cent-per-year increase, coupled with higher carcass weights, will mean U.S. pork production will grow by around three per cent next year. With flat domestic demand, the U.S. has to keep working hard on exports.

Against a broadly supportive demand background, but volatile input prices, Canadian producers must strive to improve efficiency and reduce costs in order to secure their future. We have access to genetics that will deliver 30 pigs/sow/year, modern production systems, good nutritional expertise, and excellent health status.

The tools are there, it just needs the more positive attitude that now prevails in the industry to be translated into a focus on improvement.

Bernie Peet is president of Pork Chain Consulting of Lacombe, Alberta, and editor of Western Hog Journal.

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