Pork producers are looking for a better deal on hog prices.
Following some tough times involving COVID disruptions and issues watching finished pork prices soar while farm gate prices fell, four western Canadian pork producer group boards, the Manitoba Pork Council (MPC) included, met with packers to discuss pricing issues.
Three major Canadian packers were part of those conversations — Olymel, Donalds Fine Foods and Maple Leaf Foods — producers heard during an MPC district meeting in October.
“We met with them just under the premise of having a discussion,” Alberta Pork’s Darcy Fitzgerald said. “It wasn’t to point fingers… just to sit down and look at our industry and talk about how we might go forward. Where are the issues?”
The boards argue that changing pricing formulas would drop volatility for both producer and processor and lead to less reliance on business risk management, better collaboration across the sector on trade and government policy, improved relationships, better collective brand building, quality assurance and room for investment and growth in the hog sector.
Why it matters: Hog producers say current returns on investment, under the current pricing structure, are not sustainable, and that nobody wins if one partner in the value chain isn’t making money.
“We’ve got people who need to get $195 (a hog) in order to break even or even get a return on their investment, and we’ve got others who can survive on $165-$170,” MPC general manager Andrew Dickson said. “But the challenge we’ve got is the cost for replacement of buildings continues to climb — we’re looking at over $600 a finisher place — and if we want expansion, then we’ve got to figure out a return to the producer in raising the pigs from that floor space to pay for that facility, and that dictates how much has to come from the price the producers receive for the pig, and currently, it’s not that attractive to do that.”
Cut-out value, and whether it is time for pricing formulas that lend more weight to cut-out value, is among the concepts floating around the sector.
The hog market saw a significant disconnect this year. While backlogs and market disruptions saw live animal prices fall, that fall was not marked by a similar decrease in pork price.
There are some futures options that have now been introduced based on cut-out value, Dickson noted.
“We’re hoping that will spark some interest amongst the packers to look at some additional formulas they could use to offer to producers to provide that ability to lock in good prices… ” he said.
There is a trend towards integrating more cut-out value, [email protected] Marketing general manager Bill Alford said.
“The cut-out, if it performs well, the packer is making money,” he said. “High cut-out values mean their margins are good. So if the producer’s price is at least tied to it or has a mechanism that has it as a component, we’re going in the same direction together.
“But still, you know, it’s how much money, revenue, is generated on either side,” Alford added. “There’s a relationship already between pork cut-out prices and other live hog prices, it’s just not as big a percentage.”
In May of this year, HyLife Foods did introduce a pricing formula incorporating cut-out value.
Almost all producers delivering to their company have switched to the new option, according to Dave Penner, HyLife Foods chief operating officer.
“The benefit has been to the producer, which, I think, is kind of what the expectation would be,” Penner said, noting that the program has meant that the company has paid more for its live hogs.
As a vertically integrated company, Penner admitted many of the hogs that run through their Neepawa plant are owned by HyLife Foods already. At the same time, he said, the company does also have a core of independent producers who supply hogs.
The company is currently a price leader compared to other companies in Western Canada, Alford noted, although he added that Olymel has also introduced an option with a cut-out component in it.
Maple Leaf Foods was also reached for an interview, but declined to comment.
Prices based north of the border?
Canadian price basis has also reared its head during industry discussions.
The idea of disconnecting Canadian hog price from the U.S. prices they are currently based on is not new. In May last year, MPC chair George Matheson noted that U.S. trade issues were bleeding indirectly into the Canadian market because of that tie.
“We continue to take that U.S. price and we cannot compete on feed,” Matheson said during the October producer meeting this year. “We cannot compete on labour and we cannot compete on barn construction.”
The Canadian Pork Council (CPC) has also explored the feasibility of a made-in-Canada price. That report found that, in an exploration of our pork to the U.S., China, Mexico and Japan, a Canadian origin only resulted in a premium if it was headed to the Japanese market.
“It has been demonstrated that the development of a solely Canadian price reference for hog and pork is difficult to envision, and thus the pricing process in the Canadian pork sector must remain linked to U.S. price references,” the report’s executive summary said, adding that the Canadian market should be looking at ways to absorb U.S. market disruptions.
The pandemic, “exposed the disconnect that can happen between live hog prices and cut-out prices,” Alford said. “Cut-out values soared because so many plants were shut down in the U.S.
“Even though Canada didn’t have that issue, we’re tied to that. It was sending the wrong market signal.”
In fact, he said, Canadian packers at the time would have “gladly” taken more hogs.
The CPC report on Canadian pricing included three marketing options, all of which included cut-out price, although it noted that, “it is indeed difficult to imagine that packers will voluntarily comply… ”
The report also said that lack of market information in Canada created a lack of transparency around cut-out value.
“Right now, all of the prices are discovered off USDA reported prices, because Canada simply doesn’t have the prices or data to use,” Alford said.
It is not clear, however, whether Canadian cut-out value numbers would be significantly different from those based on the U.S., given the highly integrated North American pork market.
Time to look to the East?
Interest in Quebec’s system, with its inclusion of cut-out value and more attractive return on investment, has also entered the conversation.
In 2019, the province settled on a pricing structure including cut-out value and a premium for quality pigs.
“But there’s a legal framework in which this occurs,” Dickson said.
The result is a system that is more heavily government regulated, he noted, and there would have to be legislative changes in order for such a system to be pursued locally.
The system is also far from set in stone. The formula, set out in 2019, took the U.S. benchmark price and applied both a price floor and price cap based on cut-out value. Benchmark price should be within 90-100 per cent of the cut-out value, the formula said. If below that level, prices would instead shift to 90 per cent of cut-out value. If above, the full cut-out value would serve as a price cap.
“In 2020, because of the problems they ran into with staff shortages at the plants and so on, the packers went back and talked to the board and said, ‘This isn’t working very well,’” Dickson said, noting that the “cut-out window” increased sharply to pull up the price floor.
An interim formula has since been set out.
There is, however, “a dialogue that goes on to make sure that both side’s needs are being looked at,” Dickson noted.
The packers had provided some relief during the height of the market issues, Fitzgerald noted, with Donald’s Fine Foods offering a base price of $1.40 a kilogram during those tight weeks, Maple Leaf offering an extra $20 a pig for 13 weeks — with the caveat that a producer sign on with them for another year and the Olymel cut-out incorporation.
The western boards hope more meetings with packers are in the cards for the future.