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Paradigm Shift Needed For Beleaguered Hog Industry

For the past two years, Perry Mohr encouraged financially battered hog producers attending the Manitoba Pork Marketing Co-op’s fall district meetings to hang in there – things would be better by spring.

And this year?

“It’s one of the possible outcomes,” was all the co-op’s CEO would say.

Mohr is nothing, if not a realist. A long-awaited market recovery has retreated until at least the spring of 2010. A hoped-for price rally this summer evaporated amid negative consumer perceptions about pork because of the so-called swine flu. Producers have been losing money on the hogs they sell for three straight years.

There’s still no end in sight to the financial losses. A robust Canadian dollar continues to erode producers’ profitability and equity. The U. S. country-of-origin labelling (COOL) rule limits live swine sales to Canada’s biggest customer. Feed prices, although moderating lately, continue high. Producers everywhere are floundering in a sea of debt.

So when Mohr spoke before last week’s producer meeting, with attendance barely half of what it would have been a few years back, he made a radical statement.

“We need to do things differently in order for the results to change,” he said. “All I’m saying is, we need to change our strategy as producers.”

But how?

To illustrate, Mohr took producers on a trip down memory lane.

Hog production in Manitoba exploded throughout the 1990s, aided largely by a weak Canadian dollar which encouraged exports. Much of the growth came from farrow-to-wean operations built expressly to sell to the U. S.

Governments and industry cheered producers on, promising an insatiable foreign appetite for Canadian pork.

All fundamentals appeared strong. Cheap feed gave Manitoba a competitive cost advantage. A high health status made Manitoba pigs attractive to U. S. buyers. Lenders, promising annual returns of up to 25 per cent, practically threw money at the industry. Worldclass packing plants opened in Western Canada. A few speed bumps along the way were short lived. Profits were good, and so was life.

But around 2005, the loonie began to soar, coinciding with a steady drop in market prices. Oil prices went crazy. A food-to-fuel policy pushed feed costs skyward. Implementation of the COOL rule began limiting exports. Excess U. S. pork supplies further depressed Canadian prices.

Today, although Canadian hog supplies are down 18 per cent, the erosion in producer equity continues. A wave of liquidation in 2008 saw many small producers leave the industry. Now a second wave is underway, aided by a government buyout program. The industry is at a crossroads because the ground has shifted under producers’ feet, Mohr told the meeting.

“The fundamentals of producing hogs in Canada are not the same today as they were in the ’90s,” he said.

Smaller producers are gone. So is a weak dollar to enhance producers’ revenues. Stable, predictable feed prices, unlimited access to the U. S. market and the notion of an integrated North American pork industry – all gone, too.

What will fix the industry? Mohr offered two solutions: a lot more demand or a lot less supply. He threw out a few ideas to support the second one.

Pork producers could work collectively to lower production and reduce supply. But that wouldn’t mean supply management. Because Canada exports over half its production, the industry would have to downsize by 63 per cent to satisfy domestic demand only, Mohr said.

The producers best equipped to weather the current storm are the ones owning their own land and growing their own grain. Mohr offered a “land-based production model” as the most sustainable one.

He also suggested a made-in-Canada price for hogs instead of the current formula, which is basically a U. S. price minus freight. This, said Mohr, would allow the industry to hedge currency for longer periods and reduce reliance on the U. S. market.

“The end result of the changes should produce a sustainable business model free of support from government programs,” he concluded.

In the meantime, there are some reasons for optimism, said Tyler Fulton, the co-op’s risk management director.

Fulton said U. S. consumer demand for pork is up nearly four per cent and more pork is moving domestically than in the previous year. [email protected]

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