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Trade wars cast a long shadow over hog industry

Trump tariffs a significant factor, NAFTA weighs in too

The ongoing trade war between the United States and the rest of the world is side-swiping Manitoba’s pork industry.

Hog prices have tumbled since last spring, leaving producers worried about their future just as the industry is recovering from a decade of economic woe.

“It’s pretty terrible. It’s about as bad as it’s been in about 10 years,” said Tyler Fulton, director of risk manager for [email protected] Marketing Services Co-op.

“It is on the scale of one of the worst market downturns in a decade or two.”

The reasons for the crash are complicated but U.S. President Donald Trump’s hostility to international trade agreements and his levying of punitive import tariffs are cited as factors in the pork industry’s distress.

Others include a plentiful supply of hogs in the U.S. and packers’ unwillingness to bid up prices as a result.

Uncertainty over the fate of NAFTA negotiations only adds to the volatility in hog prices and precariousness in the marketplace, analysts say.

“I think it definitely weighs on the market,” Fulton said.

The situation is particularly serious in Alberta where money-losing producers are either leaving the industry or threatening to get out.

Manitoba isn’t quite as badly off yet but producers are still weighing their options.

“I haven’t heard of anybody getting out. That’s not to say they’re not thinking about it,” said Andrew Dickson, Manitoba Pork Council general manager.

“They’re kind of hoping this thing will all blow over and they can get on with making money again.”

Meanwhile, the stakes are high for Manitoba, which is the largest pig-producing and -exporting province in Canada, according to Manitoba Agriculture. The province is responsible for 30 per cent of all pig production nationally.

Dickson said the cash price for a market hog on September 8 was $105/cwt. The break-even point for the average producer ranges anywhere between $140/cwt and $160/cwt, depending on the operation.

Some producers managed to lock in futures prices of $124/cwt for October delivery. But others who decided to wait and see if cash prices would go higher now face significant financial losses.

The irony for producers is that they were finally seeing the light of day after several years of a severe market downturn. Dickson said the Manitoba industry was experiencing “a small but pretty steady expansion” until this year’s market implosion.

Fulton said one reason for the current situation is two to three years of “very significant growth” in the U.S. hog herd. Three new hog plants which came on stream in Iowa, Michigan and Minnesota last year added to packers’ slaughter capacity. With an abundant supply of pork coming to market, buyers are reluctant to bid up prices.

Tariffs by Mexico and China on U.S. pork exports are another reason. When Trump imposed tariffs on aluminum and steel imports earlier this year, Mexico retaliated with tariffs of 25 per cent on U.S. pork. China also responded with several rounds of tariffs on U.S. products, which included pork and now range above 50 per cent.

The tariffs immediately made an impact on U.S. prices. Fulton said U.S. hog producers are feeling a reduction in prices of $6-$10/cwt as a result of the Mexican tariffs. China’s tariffs are causing a further reduction of $5-$10/cwt. (These figures are in U.S. dollars.)

Not only have these tariffs reduced the volume of exports, they have also reduced their value, hence the negative impact on U.S. prices.

Canadian hog prices are based on a U.S. formula price. So when prices suffer in the U.S., they do in Canada, too.

Dickson said U.S. withdrawal from the Trans-Pacific Partnership only days after taking office in 2017 further adds to market instability. American producers expected an expansion in overseas demand for U.S. pork as a result of the multi-nation trade agreement, and responded accordingly. Now, with a lot of pigs coming to market, packers are pushing back on price because they don’t have to compete for animals.

To further complicate matters, the U.S. government, knowing its policies have hurt American hog farmers, is offering compensation of US$8 a pig, based on 50 per cent of a producer’s inventory as of August 1. The U.S. Commodity Credit Corporation will also buy US$558 million worth of domestic pork to reduce the risk of a pork glut.

On top of everything else, uncertainty about NAFTA negotiations provides an added measure of market volatility. Fulton said the back-and-forth, on-again, off-again deadlines for completing negotiations “is no doubt impacting hog markets.”

Producers also wonder what would happen to their industry if, in a worst-case scenario, NAFTA negotiations fail and there is no agreement.

That might not be as serious as it seems because Canada currently has Most Favoured Nation status in pork with the U.S., said Al Mussell, research lead with Agri-Food Economic Systems in Guelph, Ontario.

Most Favoured Nation status is an economic position in which one country has the best trade terms a trading partner can give it (e.g. the lowest tariffs and the fewest trade barriers).

Mussell said pork currently flows between Canada and the U.S. duty free. Without NAFTA, Most Favoured Nation would kick in and free trade would continue.

“If the U.S. were to withdraw from its existing NAFTA commitments with Canada, we would then be treated as a Most Favoured Nation by the United States and reciprocally we would treat them the same way,” Mussell said.

“And life would go on for pork at least because the MFN duty rate on hogs is zero and the MFN duty rate on pork is also zero.”

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