The description of Big Sky Farms Inc. circulated by the receiver trying to find a buyer for the failing hog production company’s assets is appropriately labelled a “teaser.”
The Humboldt, Sask. business is the second-largest hog-producing company in Canada with capacity to produce up to one million hogs annually. We are told it is one of the “most efficient and cost-effective hog producers” on a global basis, it has strong operations relative to its industry peers, it has loyal employees (who are being paid bonuses of up to $150,000 as an incentive to remain with the company until its future is decided), it has dependent customer relationships, is strategically located near to feed grain supplies and it offers a vertically integrated infrastructure encompassing genetics, feed milling, transportation and production.
Sounds like a winner. The company’s EBIDTA since 2007, the last time it was restructured, has ranged from 16.6 per cent (2007) to minus 6.1 per cent (2010) for a five-year average of 6.2 per cent. Even in 2012, the year of its demise, Big Sky was expected to pull in EBIDTA of 6.9 per cent.
So why was it pushed into receivership?
“During the summer of 2012 extraordinary market forces caused a sudden and severe downturn in North American hog prices and a significant increase in feed grain prices due to severe drought conditions in the U.S. and these events severely strained the liquidity of hog producers. Big Sky was not immune from these market forces,” the receiver’s documents say.
Put simply, it ran out of cash.
The story behind Puratone’s collapse in Manitoba along with dozens of other Manitoba hog producers who have liquidated their herds and closed their barns, probably for good, is similar.
Yet we continue to hear how this industry is efficient and cost effective, ironically, often in the same sentence as a request for government to prop it up once again, so it can continue to careen from one crisis to the next — being efficient and cost effective.
It is time to set the record straight. The hog production model we use in this country is capable of producing a lot of pigs, it employs a lot of people, it is even capable of producing large cash flow, but it cannot be described as efficient and cost effective.
Not when it can’t afford to buy feed due to disruptions caused by a relatively common occurrence in agriculture, such as a drought. Not when it fails to meet modern animal welfare concerns and not when the full environmental costs are factored in.
It was refreshing to see one of the industry’s own acknowledge last week there are structural problems weighing on the sector that must be fixed if Canada is to continue to have independent hog producers.
Stonewall farmer George Matheson isn’t the first to observe the industry needs a new plan, but up until now, the ones making those observations were from outside the sector. Judging from their unwillingness to meet the industry’s requests for more aid, the federal and provincial governments have come to the same conclusion.
The industry needs to go back to the drawing board and come up with a long-term strategy that lays to rest the assumptions — a low Canadian dollar, cheap feed and lax environmental rules, and an endless supply of cheap labour — that led it into the mess it is in today. It needs to incorporate the new realities such as animal welfare and unfriendly policy environments, such as the Manitoba government’s moratorium on new hog barn construction.
We have never defended that edict as good policy. At best, it was a cop-out, pandering to the poorly informed urban voter. But that said, if and when new hog barns are built in this province, there is an opportunity to incorporate the new thinking around barn and system design.
If George Matheson is correct, this new model needs to find at least $10 a hog more for producers, either from processors or in production costs, if the Canadian sector is to remain competitive globally.
Throwing a levy on to pork imports is a non-starter. A better approach is to encourage consumers to read their labels of origin and support local producers. The record shows they will.
The current model is pushing processors into the hog production business and that fully integrated model may emerge as the dominant force for exports. But if things keep going the way they are, it will be only a few years before they too are swallowed up by competitors with deeper pockets and better ability to withstand volatile market swings.
Domestically, there may still be room for independent producers willing to think differently about systems that require a lower capital cost and higher levels of management.
It’s worth remembering that hogs were once known as the mortgage breakers on Manitoba farms, not the mortgage makers.