Pork producers warned of difficult year ahead

Hog profits last year will shrink in 2015

pigs in a barn

Despite racking up solid profits in 2014, Manitoba hog farmers face an uncertain year ahead because of falling prices, rising feed costs and problems in financing new barn construction.

Last year was a turning point for Manitoba’s long-suffering pork producers, who finally saw a return to profitability after years of low prices, high costs and crushing debt.

But a financial model developed for the Manitoba Pork Council by Meyer Norris Penny estimates the average margin for a finished pig in 2015 will plunge to $7.48 from $55.31 the year before.

Average revenues of $203.69 per pig experienced in 2014 are expected to drop by nearly 20 per cent to $163.71 this year, while the cost of feed is predicted to rise by over eight per cent.

Meanwhile, Manitoba continues to experience a serious shortage of pigs because hog barns emptied in recent years are not being replaced.

Producers used money from profits in 2014 to pay down debt and restore some equity in their operations, said Andrew Dickson, Manitoba Pork Council general manager.

But he warned it’s too early to celebrate because recovery will still be long, slow and difficult.

“One good year doesn’t prepare a balance sheet overnight,” he said.

Dickson outlined potential difficulties for 2015 in a state of the industry presentation to the annual Manitoba Swine Seminar in Winnipeg last week.

He acknowledged average prices will be lower this year but said a lot depends on the situation in the United States, where hog production is increasing, despite the PED virus outbreak.

Dickson said the U.S. will produce as much, if not more, pork in 2015 as in 2014. If it can export enough pork, prices could remain stable. But if exports are soft and Americans are forced to move excess pork into their domestic market, supplies will increase and prices will fall.

Dickson also warned about increased expenses for feed, which makes up 60 per cent of a producer’s operating costs. The U.S. Department of Agriculture suggests the north-central Iowa soybean price could top $10 a bushel in 2015 after falling below $9 in late 2014. Corn could increase to $4 a bushel after dipping below $3.

The U.S. country-of-origin meal labelling rule continues to hurt Canadian swine exports. Iowa imported 2.15 million weanlings from Canada in 2014, down from four million in 2008, mainly because of segregation restrictions resulting from COOL. Manitoba accounts for over 60 per cent of Canadian weanlings exported to the U.S.

But the real problem for the Manitoba industry is a decline in hog production and the resulting impact on the provincial economy because aging barns are not being replaced, Dickson said.

In his presentation, he said producers should be replacing 20 to 30 barns a year with newer, larger facilities just to retain current capacity. But only four new barns were built between 2008 and 2013.

The financial downturn in the industry is partly to blame for the lack of construction. But a lot of the problem stems from the fact that lending institutions are reluctant to lend producers enough money to replace or upgrade their facilities, said Dickson.

He said financial institutions lend at 65 per cent of the appraised value of existing barns on the market. But since there are few new barns and the value of existing ones is so low, banks can’t lend enough for new facilities and producers have to fund up to 70 per cent of the cost themselves. As it is, producers have maxed out their lines of credit because of five years of low or negative margins.

Also, financial institutions traditionally lend working capital based on a producer’s previous three years of income, which until recently was very low.

As a result, the pork sector is stuck in a “fiscal trap” similar to rental property construction in Winnipeg after rent controls were imposed, Dickson said.

The lack of barn space and the resulting shortage of pigs make it tough for the province’s hog-processing plants. Currently, Manitoba’s two federally inspected plants are running at only 75 to 80 per cent capacity and are short about 1.5 million finished pigs a year. In the U.S., comparable plants operate at 97 per cent of capacity, making the Manitoba plants uncompetitive.

Dickson warned the lack of hogs could result in Maple Leaf closing the second shift at its Brandon plant, losing about 1,000 jobs. Without the second shift, Maple Leaf could become uneconomical to operate and all 2,300 jobs could be lost.

“This is a dark precipice we’re trying to avoid driving over,” Dickson said in an interview.

Another problem is the Manitoba government’s ban on the construction of new hog barns without anaerobic digesters. Dickson said the province recently agreed to a pilot project for new construction in which two-cell lagoons, separate streams of manure treatment and direct injection into fields would be allowed in place of digesters.

On the bright side, the lower Canadian dollar is positive for swine exports to the U.S., despite COOL. And Dickson is confident the worst is over for the beleaguered industry and producers who weathered the storm are here to stay.

“There’s light on the horizon and it’s bright sunshine,” he said. “The people who survived to now are going to be in business 10 years from now.”

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