After a six-year period of poor profitability, Canadian producers are on a knife edge, especially those in the West. With the hog price at around $1.45 and production costs of at least $170 per hog, they have been bleeding cash over the winter. And now the latest census data suggests that the supply of hogs in North America this year is going to be larger than expected.
Couple that with issues such as export barriers, COOL, the situation in the EU and unknown harvest prospects and it’s not surprising that the current mood is one of uncertainty.
First, the combined U.S. and Canadian total hog inventory for December 2012 was only slightly down compared with 2011, while the breeding herd, at 7.03 million head, was up a little. Expectations were that high feed prices would have led to lower numbers. But it appears that U.S. producers have held their nerve, despite significant losses, and are banking on a big drop in the price of corn after this year’s harvest.
In Western Canada, producers continue to quit production as their equity runs out, but the attrition is not yet reflected in the census figures. Those still in business are hoping for a surge in summer prices, but this seasonal rise will probably be muted by the higher-than-expected hog numbers.
Futures prices and the pundits’ predictions have already weakened. The George Morris Centre’s Canadian Pork Market Review published in the middle of last month predicted an average price of $1.60-65/kg for Alberta during March, yet the price has stayed around the $1.45 mark so far, and that with the Canadian dollar weakening. It predicted a peak of $1.70-75 in May, and a fourth-quarter price of $1.50-55. If the current price weakness persists and the mid-year price peak is only $1.60-65, that means that producers will be unprofitable for the whole year unless feed prices weaken substantially prior to the harvest.
The other factor working against higher prices is the continuing improvement in the productivity of the U.S. industry. Over the last 10 years, the number of pigs weaned per sow has increased by 0.2 and passed the milestone of 10 per litter in 2011. With nearly six million sows in the U.S. breeding herd, that’s about 1.2 million extra pigs coming to market each year, with plenty of scope for more improvement. My concern right now is that, in the fall, prices will weaken even more than predicted and, despite lower feed prices, Canadian producers will be under severe economic pressure.
Each time this happens, it has been Canadian producers who have quit, not those in the U.S. who receive a higher price for their hogs and have much better hedging opportunities.
EU production down
While I remain somewhat pessimistic about prospects this year, there are several things that may change the situation. The latest forecasts of pig production in the EU have been revised sharply downwards, with Eurostat reporting that member countries predict a 6.9 per cent drop in slaughterings during the third quarter of this year compared to last and a drop of 7.2 per cent for the fourth quarter. This is partly in response to high feed prices, but probably more likely due to the partial sow stall ban which is leading to a significant exodus from the industry in some countries.
Fewer pigs in the EU will mean that they have fewer to export, opening up opportunities for North American exporters and increasing the demand for pigs, which would support prices.
The second factor is the possible impact of changes in U.S. COOL legislation. Recently released proposed changes to the country-of-origin laws have been met with dismay by both Canadian and U.S. livestock and meat organizations.
“The proposed rule is even more onerous, disruptive and expensive than the current regulation implemented in 2009,” said J. Patrick Boyle, president of the American Meat Institute. If the change goes ahead as currently written, Canada will likely be in a position to levy retaliatory tariffs that should flow to its pig producers.
If by some miracle, the U.S. capitulates and complies with the spirit of the WTO ruling, then that will be beneficial to the trade in live pigs from Canada.
Finally, U.S. pork exports have helped to support hog prices over the last few years and have mopped up surplus product. Exports set a record during 2012, reaching 2.26 million tonnes, valued at $6.3 billion, up 3.5 per cent on 2011 and representing 23.5 per cent of U.S. pork and pork production. Exporting has not been without its problems, though. Russia stopped pork and beef imports from the U.S. in December, claiming it had detected traces of ractopamine.
However, such non-tariff barriers are designed to support the developing Russian industry in which some of the powerful oligarchy have money invested. Their aim is to eventually be self-sufficient, although this will take a long time. In the meantime, they do not want to stop further expansion in response to low profitability and will seek to support the hog price by restricting imports by one means or another.
There are a lot of unknowns facing western Canadian producers during the rest of this year. Unless some of the stars align more favourably for producers, there could be a significant drop in production over the winter period.