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Pork Producers Re-Enter Survival Mode

Bernie Peet is president of Pork Chain Consulting Ltd. of Lacombe, Alberta, and editor of Western Hog Journal. His columns will run every second week in the Manitoba Co-operator.

Following several months of small to moderate profits over the summer, a dramatic fall in hog prices and soaring feed costs have once again put Canada’s pig producers in a perilous position.

After three years of hemorrhaging cash, producers hoped a sustained period of profits would rebuild equity. Those hopes have been dashed on the rocks of U.S. oversupply and expensive feed.

Jim Haggins, chairman of Alberta Pork, told a recent series of regional producer meetings that producers are currently losing $37 per hog, assuming a production cost of $1.45.

“That translates into a loss of equity, in Alberta alone, of $1.7 million every week,” he says.

Because Canadian hogs are priced against U.S. markets, the high Canadian dollar has put a major dent in producer returns. However, producers are increasingly questioning their prices relative to their counterparts in the U.S. and around the world.

“Canada has the lowest prices in the world and Alberta has the lowest price in Canada,” Haggins says. “Pricing formulas must be adjusted if we are to survive. There is no future for the industry if we keep losing money – we must get more for our pigs.”

Haggins believes that Alberta producers are receiving 10-15 per cent below what they should relative to U.S. prices.

“The formula favours the packer,” he says. “The industry needs to reduce its debt burden, maintain its current production base, generate recapitalization and encourage new investment. The future has to be based on profit.”

CUTTING COSTS

Alber ta Pork has been restructuring its activities in order to face the new realities of life in an embattled industry. It is now focusing on initiatives “that can benefit pork producers by providing services that will either help reduce production costs or improve revenue streams.”

Haggins says a key part of this goal will be to develop a better knowledge of production costs relative to competitors.

“We are going to work with other provincial pork boards and government in order to establish a benchmarking program for costs of production,” he says.

Alberta Pork will be looking at ways of improving returns and reducing risk via mechanisms such as minimum pricing, ledger accounts and forward contracting. It is also working with Agriculture Financial Services Corporation on a hog price insurance program, which should become operational in the spring. In addition, the Canadian Swine Health Board is developing the concept of “mortality insurance” which would provide protection against the effects of a major disease outbreak such as occurred with circovirus, Haggins says.

A change to Alberta provincial checkoff legislation means that Alberta Pork’s previously compulsory levy becomes voluntary and refundable in May 2011, which creates uncertainty about revenue. Recognizing that producers are under financial pressure, it has proposed a reduction in the levy from $1 to $0.85. It has also looked at cutting costs in order to improve efficiencies and give producers better value.

Haggins says that even with a reduction in budget of over $600,000 compared to the previous year, Alberta Pork can represent producers effectively. “I am confident we can handle any unexpected costs from our $3-million reserves,” he says.

STRATEGY ABANDONED

A three-year Revitalization Strategy aimed at creating an Alberta Brand for pork and creating more value in the production chain that would feed through to producers has been abandoned. Getting all the players in the pork supply chain to co-operate in the initiative seems to have been an impossible task and there is a sense of frustration evident in Alberta Pork’s Annual Report.

“The sooner we realize that producers, processors, retailers and government are collectively affected by what happens or doesn’t happen in the supply chain, the sooner the pork and agriculture industry will be sustainable and ready to meet consumer needs,” it says. “Strong business relationships need to be based on reasonable economic returns for all in the relationship. This really starts with the packer/producer relationship and that must change right now.”

There is a new urgency about the situation in the pork industry and a growing realization that massive change is required if it is to survive in its current form. After three years of losses, most producers have no Agri- Stability margins left, leaving them vulnerable to sustained losses, while banks are running out of patience. The approach now being taken by Alberta Pork may become the model for other provincial pork organizations as producers fight for their livelihoods.

There is no doubt that after having the light at the end of the tunnel extinguished so quickly, producers are angry, frustrated and perhaps prepared to be a bit more militant in their activities in future.

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bernie peetPeet onPigs

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