Market disruptions due to COVID-19 have landed the pork market in a bad place as of late April. Multiple plant closures in the U.S. have dried up markets for Canadian weanlings, a two-week plant closure of an Olymel facility in Quebec stranded tens of thousands of market-ready hogs, and producers are now wrestling with dwindling barn space as supply chains back up and prices that have suddenly plummeted.

Why it matters: The pork sector argues that operations are creeping closer to the financial edge each day and that, in turn, might threaten pork supplies if the government does not step in.

On April 23, Hams Marketing noted that, “at least 10 primary and secondary U.S. pork-packing plants were closed or partially closed due to COVID-19 outbreaks on the production line.”

Those closures represented about 15 per cent of U.S. pork capacity, it noted.

Plants that haven’t closed have still seen a slowdown in production lines, industry groups have warned.

Andrew Dickson, Manitoba Pork general manager, has previously noted that social distancing has added challenge to production lines and slowed capacity.

The same April 23 Hams Marketing report said that U.S. slaughter volumes as of April 21 were down 25.5 per cent compared to the year before, a major shift from the trend earlier in the year, when packers were operating well above last year’s volumes.

The Canadian Pork Council expects producer losses to hit about $30 a head, rising to $50 a head in some regions, or about $675 million in loss due to the market slowdown.

“There has to be a political will to help us who create food for the country to consume,” council chair Rick Bergmann said. “Without action, family farms will be threatened. They are threatened already. The risk of our food supply disruption increases, and so does food insecurity if supplies tighten and food gets more expensive.”

In the second week of April, Dickson reported that some producers selling isoweans on the cash market were taking no price on their animals, and were in some cases paying transport for those valueless animals, in a desperate bid to clear barn space.

The April 23 marketing report from Hams Marketing put average isowean price at $5.60.

Bergmann, meanwhile, noted that some isowean operations in Western Canada were no longer able to find any buyers for their open-market animals.

“That is a drastic concern,” he said.

Cry for help

On April 23, the Canadian Pork Council said it was asking the federal government to pay producers the equivalent of $20 per head to ease the financial crunch.

Bergmann says the aid is needed to help producers cover feed and fuel costs in the immediate future and to help secure the future supply of pork.

“COVID-19 has quickly pushed farmers into a negative cash flow position. Their market returns don’t even cover the costs of operating the business,” Bergmann said.

“Our figurative farmhouse is burning down,” he later added. “Now is not the time to think about windows or what colour of paint we’re going to paint the house and how we can improve it. It’s burning down right now, so we really need a response on finding the solution… we need the fire crew to show up and put a lot of water on.”

The sector has warned that the need for aid is critical.

The council’s vice-president, René Roy, warned that the window for aid should be counted in days, rather than months.

Manitoba Agriculture and Resource Development is also monitoring the situation and is in “constant contact,” with the pork sector, a representative from the department said, although no programs specific to the pork industry have been announced.

Agriculture and Agri-Food Canada did not respond to requests for comment as of press time.

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The company, one of Canada’s biggest pork processors, is focusing on expanding into new businesses in the United States. Its latest acquisition was the US$120-million purchase of vegan foods company Field Roast Grain Meat.

Maple Leaf said sales in the reported quarter rose nearly six per cent to $876.8 million. However, gross margins fell 14 per cent on higher costs.

Net earnings fell to $59.1 million, or 45 cents per share, in the fourth quarter ended Dec. 31, from $76.2 million, or 56 cents per share, a year earlier.

Excluding items, the company earned 41 cents per share, beating analysts’ average estimate by two cents, according to Thomson Reuters I/B/E/S.

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Statistics from the Canadian Pork Council show that in the decade ending in 2016, exports rose in value by 51 per cent to $3.8 billion from 2006 and by 19 per cent since 2011.

Measured by volume, they grew by 21 per cent over the last decade to 1.2 billion kilograms and eight per cent since 2011. Between 2015 and 2016, the growth in value of exports was nine per cent and in volume it was five per cent.

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“Pork producers understand that market access is of paramount importance to the sustainability of the country and the hog industry,” CPC chair Rick Bergmann said. “The development of international market opportunities like Japan and China creates Canadian jobs across the country, attracts investment and contributes to growing the economy.”

Because of these clear benefits, the council takes a proactive position in support of international market access, he said.

“It is a strong advocate for pursuing new or expanding existing trade agreements to increase market access or prevent deterioration in Canada’s competitive position in a market,” Bergmann said.

The statement came as the European Parliament and the House of Commons ratified the Canada-Europe free trade deal.

The council says Canada exported pork to more than 100 countries. The United States, China and Japan remain Canada’s top three pork export markets in both volume and value.

Japan continued as a high-valued market worth $1.07 billion for Canadian pork. Demand for Canadian pork in the Chinese market increased by 144 per cent in 2016. Canada shipped 312,000 tonnes of pork, worth $580 million, to China, an increase of 157 per cent.

“Canadian hog producers, pork processors and meat traders and the many other companies in Canada that provide inputs and services to our industry have a very strong interest in Canada aggressively pursuing further progress toward reducing agri-food trade barriers and trade-distorting subsidies, and achieving additional market access,” Bergmann said.

The pork industry generates $13.1 billion in economic activity and 31,000 on-farm jobs. Another 69,000 Canadians rely on the pork sector for their livelihoods. Well over 70 per cent of the industry’s output is now exported.

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The company, whose brands include Schneiders and namesake Maple Leaf, recently completed a program started in 2010 to boost earnings by shutting some plants and modernizing others.

Adjusted operating earnings for the meat products segment rose to $62.9 million in the second quarter ended June 30, from $17.7 million a year earlier.

The company, which is one of Canada’s biggest pork processors, reported net earnings of $31.4 million, or 23 Canadian cents per share, compared with a loss of $7.5 million, or 5 Canadian cents, a year earlier.

On an adjusted basis, Maple Leaf earned 32 Canadian cents per share, one Canadian cent above analysts’ average estimate.

Maple Leaf, whose agribusiness unit supplies livestock to the meat products group, said total sales rose 4.1 per cent to $854.6 million.

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Ralph Eichler told the Senate agriculture committee there’s a shortage of skilled labour and regulatory changes are at least partially causing that.

“Changes to the Temporary Foreign Worker Program have had significant impacts on the ability of Manitoba agriculture and agri-food employers to meet their labour market needs,” Eichler said.

Other provincial governments and many industry groups and businesses have echoed similar concerns in recent months, and Eichler characterized the changes to the TFWP in recent years as a “barrier to success and growth.”

“It has hampered the ability to grow our meat-processing industry,” Eichler said. “Our major pork processors, Maple Leaf and HyLife, have had their capacity and growth severely diminished and will continue at such a constant unless we allow them access to labour that cannot be found locally.”

The federal government, which is currently reviewing the program, should allow regional flexibility based on local labour market needs, he said.

“Our producers have voiced concern about new stricter border input control measures and enforcement of the rules that are affecting returns from the marketplace,” Eichler said.

New trade agreements are offering potential new export opportunities, he noted, but that also means more competition for the domestic market, which translates into a need to keep domestic producers competitive.

Other priorities for the new Manitoba government include encouraging innovation and increased collaboration, including joining the New West Partnership to eliminate interprovincial trade barriers and supporting the Trans-Pacific Partnership (TPP) trade deal, and reduction of red tape, a signature election promise for the freshly elected Progressive Conservative government.

He noted that agriculture generates $6 billion annually in cash receipts and that food processing represents about a quarter of all Manitoba manufactured goods every year.

“Growth in value-added processing and exports of commodities and food is necessary for economic growth and job creation,” he said.

Eichler had to cut short his presentation and it was completed by Dori Gingera-Beauchemin, the province’s deputy agriculture minister.

She told senators that Manitoba chicken farmers share the concerns of producers in other jurisdictions over the increase in spent fowl coming across the border and they expect Ottawa to take action to maintain border diligence and reduce competition.

She also said building consumer trust in the food industry is crucial, adding that the industry is coming to see it as one of the biggest issues it faces.

“Part of the challenge is that the game keeps changing,” she continued. “The requirements from the market keep changing. Every time there is an adjustment to market demand and the public’s expectation, the cost, of course, is borne by the producer in making those changes. Yet the producer wants to meet the expectations of the consumers. The producer wants to be able to provide that food and then have the consumer return respect for the food in ways of being able to pay for it.”

While producer and industry groups are leading a large collaborative effort to deal with the issue, governments can help bring all the parties into the discussion, she said.

“Whether we are working with our primary agriculture producers or on those who transform commodities into food products, or whether we are working with the retailers or restaurant and hotel trade, if the whole supply chain isn’t agreeing on the framework we have, we will lose continuously profitability as producers try to react to changing market demands,” she said.

“It has to be the whole system in order to be able to be effective and consistent and to be able to provide the trust that consumers are looking for.”

Consumers and farmers have shared interests, said Gingera-Beauchemin. Consumers want food they can trust and farmers want to provide that to them. The challenge is finding a durable standard both sides can agree to.

“It is now time for the system to agree on a framework that allows as much of the market demand to be satisfied by Canadian product,” she said. “For us to be able to ensure that Canadians as well as our global customers can trust our food is the next important space for the industry to play in. We have a framework that works. We are small enough and we have lots in common. Canada can set an example around the world in bringing that consensus together.”

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But it is not yet clear what the overall impact on the Canadian meat sector will be.

VPSS, Russia’s veterinary and phytosanitary service, estimates about half of the Canadian companies that export meat to Russia, will be blocked from sending product. But it has yet to release a list of the plants from which product will be accepted.

However, John Masswohl, vice-president of the Canadian Cattlemen’s Association, has said every exporter could be affected. At the same time, Canadian Pork International thinks 12 member plants will be able to keep shipping. The Canadian Meat Council, which represents packers and processors, had no comment.

Meanwhile Agriculture Minister Gerry Ritz said the Russian decision was disappointing because Canada had been trying to assuage Russian concerns about the safety of ractopamine. Health Canada approved its use after doing a health impact study.

“Despite our collaborative efforts, the Russian government is moving forward with this measure not rooted in science,” Ritz said. “We continue to work aggressively with Canadian industry to restore their access into the important Russian market.”

Canada has been the largest pork supplier to Russia and accounted for 25 per cent of its imports in 2012. The pork sales were worth $500 million last year while the sale of Canadian beef products in 2011 amounted to about $15 million.

Canada’s two biggest pork processors, Olymel and Maple Leaf Foods, have some facilities that should be eligible.

“We’re working very hard to meet Russia’s expectations,” said Olymel spokesman Richard Vigneault. “It’s a very important market for us.”

The Canadian Cattlemen’s Association says the levels of ractopamine being fed to Canadian cattle are well below the internationally set limit. The additive enables the animals to digest more of their feed and this helps farmers be more efficient and reduce production costs.

In addition to Russia, South Korea and Taiwan have banned it over concerns that residues could remain in the meat and cause health problems even though scientific evidence indicates it is safe.

In December, Russia required all imported meat to have never been treated with ractopamine, which severely reduced beef shipments. Now it will only take product from plants that don’t handle animals fed the stimulant.

Russia had banned U.S. beef, pork and turkey because of ractopamine even though the additive isn’t used in turkey production. The U.S. has said it suspects the ban had more to do with American criticism of Moscow’s human rights’ record.

Russia imported 1.32 million tonnes of red meat, excluding offal, worth $5.12 billion from countries outside the Commonwealth of Independent States in 2012.

One option for Canada is to challenge the Russian action at the World Trade Organization, which Moscow recently joined. However, trade complaints take a long time to resolve at the international trade body.

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Weeks of talks between Ottawa, the provinces, and producer representatives have ended with producers being told to make use of existing support programs.

“I was pretty disappointed to see that,” said Karl Kynoch, Manitoba Pork Council chairman. “This shows us that government is not taking the hog industry seriously.”

Producer organizations were asking for as much as $150 million in bridge financing to cope after the drought in the U.S. Midwest sent feed prices soaring. That caused prices to plunge as producers on both sides of the border emptied their barns. Manitoba, a major producer of weanlings was hit especially hard, as American demand for piglets dried up.

Market conditions are expected to improve in the spring, but that will be too late for many, said Kynoch. Both the province and Ottawa are urging hog farmers to tap their AgriInvest accounts for immediate assistance and request an AgriStability interim payment.

That doesn’t cut it, according to Kynoch.

“A couple of dollars a pig when you’re losing $30 to $50 really doesn’t do much,” he said, adding successive poor years mean some producers don’t have adequate reference margins to make use of the programs at all.

That’s exactly what hog farmers are telling Keystone Agricultural Producers.

“Producers that have been contacting us at KAP are saying these programs are not going to be adequate,” said KAP president Doug Chorney.

Manitoba Agriculture, Food and Rural Initiatives Minister Ron Kostyshyn said he will continue to work to find ways to support pork producers in the short term.

“We are in consultation with the Manitoba Pork Council and obviously with the financial institutions that are a part of this as well,” he said. “Somehow the partnership needs to develop and shed new light as we move forward.”

While acknowledging not every producer is in the same “breadbasket” when it comes to existing programs, Kostyshyn said farmers must look to them first.

“This is the opportunity for them to… harness these dollars,” he said.

Government is working with producer groups that deliver cash advances under the Advance Payments Program to ensure that applications are processed quickly, and Agriculture and Agri-Food Canada will adjust the Hog Industry Loan Loss Reserve Program to ensure greater flexibility in dealing with the current liquidity crisis.

Program terms have been adjusted, allowing lenders to extend interest-only payment periods. As well, a Hog Industry Task Team, which includes the Canadian Pork Council, pork processors and producers, will attempt to ensure producers are making “full use of existing programs.”

But unless the financial needs of distressed producers are met, many will exit the industry, said the head of the Canadian Pork Council.

“We need to have short-term actions now to maintain a critical mass of the industry and to continue to make a significant contribution to Canada’s economy,” said Jean-Guy Vincent.

If there is any silver lining to the decision, Kynoch said it’s that producers now know what to expect from government.

“That does allow a producer to make a decision… whether to shut down their barn, or to carry on and try to get through,” he said.

In 2011, Canada exported $3.6 billion worth of pork products and hogs to 140 different countries. In Manitoba, 13,000 jobs are tied to the pork industry.

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However, as the details of the trade deal are still being negotiated, the groups carefully stuck to the merits they can see in a deal without getting into issues outside their immediate interests.

After several years of negotiations, the government hopes to have a tentative deal before the end of 2012. While it has consulted with provinces and economic groups, it has said little to counter municipalities and other groups which have attacked the deal for various reasons from losing control of government procurement to tougher rules for generic drugs.

The posse was intended to counter the criticisms, but the Conservatives could do little more than offer hopeful predictions of increased trade and more jobs for Canadians.

Jean-Guy Vincent, chairman of the Canadian Pork Council said an ambitious Canada-European Union trade agreement would significantly enhance the sector’s export opportunities as well as benefit workers, businesses and families who rely on the pork sector for their livelihood.

While there are no tariffs or quotas on pork imports to Canada, the Canadian industry is seriously constrained from access into the EU because of tariffs, tariff rate quotas, import permits and licensing requirements, he said. Equivalency in access conditions for pork trade between Canada and the European Union is one of the most promising opportunities to increase returns and to provide growth for hog producers and value-chain partners, including grain growers, pork processors and the many Canadian companies involved in the meat export trade.

Martin Unrau, president of the Canadian Cattlemen’s Association, said achieving unfettered market access into the EU, where annual beef consumption is approximately eight million tonnes, would improve the industry’s competitiveness.

“The CCA supports reaching a free trade agreement with Europe that will eliminate a prohibitively high beef tariff as well as address several technical issues that prevent Canadian beef from realizing its potential in that very lucrative market,” he added.

“The CETA agreement will mean more exports which will in turn mean more profits for Canadian farmers at the farm gate,” said Stephen Vandervalk, president of Grain Growers of Canada.

CETA is the greatest trade opportunity Canada has seen since NAFTA, he said. “The European Union has 500 million people and a GDP of over $17 trillion. Their tastes are similar to ours and they have an appreciation for high-quality Canadian agriculture products. It is a market where we have a lot of room to grow and it is a market that has cash to pay for high quality.”

Currently, Canadian exports to Europe are only one-tenth of what Canada sells to the United States. “Farmers have learned through experience, while the U.S. is one of our best trading partners, we need to diversify where possible,” said Vandervalk. Future projections from a joint study with the EU indicate that a CETA agreement could boost bilateral trade by 20 per cent and could increase Canada’s annual income by $12 billion.

He praised Ritz and Trade Minister Ed Fast for their work on developing new markets.

“It is important the Canada-EU deal remains a high priority, so we call on the government to step up their efforts towards a successful conclusion to this trade deal,” he said.

Richard Phillips, president of the Canada Agri-Food Trade Alliance, noted 50 agri-food leaders were out to highlight the importance of trade. “It is critical to the viability and vitality of Canada’s agriculture and food sectors. In Canada we export $40 billion a year in agriculture and food products. Without trade the size, shape and stability of Canada’s agri-food sectors would change for the worse.”

Canada currently exports half of its agriculture and food products including 50 per cent of its beef production, 65 per cent of its malt, two-thirds of its pork, almost 75 per cent of its wheat and 85 per cent of its canola. CAFTA members represent 80 per cent of Canada’s agri-food exports.

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This was the message to producers from Dr. Eduardo Beltranena, with Alberta Agriculture and Rural Development, at the recent Centralia Swine Research Update held in Kirkton, Ontario.

“Packers want heavier carcasses to spread costs over more kilograms of pork processed,” he explains. “However, heavier carcasses mean that hogs stay in the barn longer to reach higher live weights, which implies reduced barn turnover rates and more kilos of feed per hog sold. Producers question whether there is an economic benefit to them especially at times when pork prices are low.”

Beltranena notes a number of factors which producers must take into account when deciding the best strategy. “The most important consideration producers should make regarding housing hogs in barns longer is pen stocking density up to first pull for slaughter,” he says.

A first step to understanding the implications of higher weights is to calculate the optimum stocking density, using the formula 0.034 x Body Weight 0.67, which will allow the correct number of hogs per pen to be calculated.

“Typical pens measuring 2.5 x 6 m (8 x 20 ft.) should house 17 hogs to a market weight of 120 kg,” Dr Beltranena says. “If filled with 22 hogs, which is a common commercial stocking density, hogs will be crowded for the last third of their stay in such pens.”

He encourages producers to learn how to calculate pen space allocation and the weight at which pigs start to outgrow their space. The potential for crowding finisher pens has also increased due to higher breeding herd productivity, he notes.

Crowding hogs reduces feed intake and consequently weight gain. “Limited floor space and restricted feeder access have additive effects,” Beltranena says. “Research carried out at the Prairie Swine Centre suggests that for every three per cent below the critical individual pen space allocation, there was one per cent reduction in daily weight gain and 0.75 per cent reduction in feed intake.”

Slower growth compounds the pen space problem because pigs take longer to reach market weight.

Returns uncertain

In addition to the challenge of pig flow in the finisher barn, Beltranena says producers may not get a return on the cost of feeding pigs to heavier weights.

“Depending on finishing diet cost and taking into account the poorer feed conversion at heavier live market weight, it could cost $4-$8 more to feed a hog to gain 6.5 kg, giving a five-kg heavier carcass,” he explains. However, he suggests, if crowding hogs results in progressive feed restriction, a reduction in backfat may result in a lower yield class on some packer grids.

“For a common Alberta packer grid, I calculated that a producer would not earn the extra $5 per hog necessary to cover feed costs if average backfat was reduced by two mm due to pigs being kept longer in crowded conditions in order to produce a five-kg heavier carcass,” he says.

Options evaluated

Given that pen space is finite, what are the long-term options to alleviate pressure? A detailed study at the University of Minnesota modelled the implications of selling hogs as they reached market weight, selling hogs within pens to maintain the required space allocation — even if that meant selling them light — selling weaners, reducing sow breedings or constructing additional finishing space.

“They concluded — based on return on equity — that reducing sow breeding was the least preferred, because underutilized sow crates are the most costly asset,” Dr. Beltranena notes. “Selling weaners was the next most undesirable option and selling underweight hogs to maintain within pen space allocation was intermediate. The best option was to construct additional finishing space as it would be amortized over the long term, followed by marketing hogs as they reached target market weight.”

If producers intend to build some additional finishing space, they should consider constructing in-barn lairage pens because this will allow pigs to be fasted prior to shipping, Beltranena advises.

“Up to $3 worth of undigested feed can be found in the stomach and guts of pigs taken directly from their pen when they have uninterrupted feed access right up to the time of shipping,” he says. “Hogs should be fasted for 12-24 hours, including the time in the plant lairage. Not fasting hogs long enough can affect pork quality, reducing revenue to the producer and the packer.”

The strategy for removing pigs for market also needs to be considered as a means of minimizing the number of days that pigs are crowded. Dr. Beltranena suggests starting the first pull of pigs earlier to create more space for the remaining pigs, even if it means those pigs being slightly light relative to the optimum weight on the packer grid. Another alternative is to market a proportion of the hogs on a lightweight grid or to ship to a small, local abattoir that requires smaller pigs, he says.

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