All Things Considered – December 2012

It wasn’t supposed to happen this way,” is how Daryll E. Ray, Blasingame Chair, Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, summed up the state of the North American hog industry in a 2009 newsletter.

Now, three years later, it bears repeating, as the hog industry is in a difficult situation. One of the four largest companies in Canada is in receivership – again – and another is bankrupt. Others are pleading for hundreds of millions of dollars in government help to bring short-term stability to the industry.

The causes of this year’s crisis are straightforward: the rise in the value of the Canadian dollar versus its U.S. counterpart and other currencies, higher corn and soymeal prices due to the U.S. drought and mandatory country of origin labelling by the United States have reduced prices for feeder pigs being exported.

All of this resulted in $40-50 per head losses for producers. And faced with such losses, some producers are trying to staunch the flow of red ink by selling down their herds or liquidating them altogether. This increases the flow of hogs to market at a time when consumer and export demand is softening and the end result is dropping market prices.

As Ray pointed out in his 2009 commentary, this wasn’t supposed to happen. In the 1990s, Canada rid itself of the remains of the Crow Rate, which subsidized the cost of moving Prairie grain by rail to port. This was, in part, designed to eliminate grain market distortions. “As a result, we ended up with increased hog production because Western Canadian farmers saw it as a way to diversify their income sources and increase the value of their grains by feeding them to hogs,” Ray wrote.

What wasn’t expected was the way the Canadian industry evolved. Prairie feed grain production would boom and be more than adequate for an expanded hog herd, but in reality, it didn’t and wasn’t. Instead, canola boomed as better varieties of the oilseed were developed, markets grew and prices increased. Farmers also developed a preference for corn and soybean meal imported from the U.S.

Importing feed from the U.S. to raise hogs to market weight seemed to make little sense. So much of the industry specialized in feeder pigs, which were born in Canada and then shipped south to be raised to market weight and processed.

The industry also consolidated. Bigger was definitely seen as better especially by provincial governments that provided a variety of forms of encouragement including financial encouragement.

The day of what were known as the “in and outers” was over. These were grain farmers who, when grain was in surplus and low in price, would produce hogs, and this worked because quite often when grain prices were low hog prices were high.

That system looked sloppy and incoherent to policy makers, but on the farm it offered a form of financial stability and it worked.

Ray wrote that it was happening in 2009 and warned individuals to “call into question some of the assumptions upon which the industry is built. And in some ways it is less resilient than it was when farmers could switch from grains to meats and back depending on the relative profitability of each item.”

“Less resilient” is probably an understatement. Two-thirds of Canadian production is dependent on exports, and when markets are good they can be very, very good. But they are fragile. If Russia, or any other country, decides it should produce more hogs and import less pork, it hurts. If the United States decides it wants country of origin labelling, it hurts.

If the Canadian dollar rises in value, it hurts.

When drought or other production problems cause grain prices to spike and all you’ve got to earn an income are hogs, it hurts. When herds start liquidating and hog prices fall, it hurts. When governments tire of looking at the second massive bailout in three years, it hurts.

And when you look back at the prospects for the hog industry heading into this year, it really stings. Record acreage and a bountiful corn crop was predicted for the U.S., grain prices looked as if they would be low, the Canadian dollar was sitting under $1 US, and was stable, and Canadian hog exports were booming.

But then, as it happens, everything changed.

If you are wondering what this has to do with the Canadian poultry industry, the answer, thankfully, is not much. But it is worth noting that in a way – marketwise – chickens are small hogs. If the Canadian poultry industry had decided decades ago not to adopt supply management (as the hog industry did) everything now hitting the hog industry would be pummelling poultry.