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Impact of Characteristics of the Farmers and their Business on Profitability in the Canadian Hog Industry

by 5m Editor
18 December 2006, at 12:00am

By Verna Mitura, Statistics Canada - The purpose of this study is to identify the characteristics of Canadian hog farms and their operators that significantly influence their financial success and how it is influenced.

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Executive summary

An ordinary least squares (OLS) regression model was estimated using 828 observations to represent 5,234 Canadian hog producers.

The results show that techno-economic

efficiency, the share of the farm’s receipts generated by hog sales and being located in the Prairie Region are positively related to financial success. Conversely, the debt ratio negatively influences financial success, and this relationship diminishes as the debt ratio increases. Farm size would appear to be proportional to operating income and negatively related to the profitability ratio.

Introduction and background

Hog production has an important place in the Canadian agricultural industry. In 2004, hog production generated 25% of national cash receipts from livestock sales. Canadian producers had 14.9 million hogs in inventory, equivalent to half of Canada’s population. Hog production has grown substantially in recent years. In fact, from 1997 to 2004, the number of heads produced increased 69%. This is essentially related to the growth of live hog exports, which rose 168% during the same period.

The increase in production was especially pronounced in the Prairie provinces, where production grew by 90% from 1997 to 2004. The magnitude of the growth was particularly marked in Manitoba. Hog production in that province grew by 161% during this period while Saskatchewan and Alberta registered an increase of 92% and 40%, respectively.

The start of this growth coincides with the 1995 repeal of the Western Grain Transportation Act (which replaced in 1983 the Crow’s Nest Pass Act enacted in 1897) which established a permanent preferential rate for the movement of Western grain. The fact that these two events coincided suggests that the increase in transportation costs for grain and oilseed crops encouraged Western farmers to raise livestock in order to increase the value added of their production.

For the past few years, the profit margins of this sector have come under various pressures. The introduction of new environmental rules, vertical integration and rising energy prices are a few of the underlying causes. This would lead to pressure on costs and in turn on profit margins. Hence, an understanding of the factors associated with financial success is relevant information for individual farmers and the industry as a whole.

Earlier studies on the financial success of farms have focused on the impact that a farm’s characteristics have on its financial performance. These studies generally find that farm size, the relative share of household income derived from the farm, the share of farm receipts generated by hog sales and the region where the farm is located1 significantly affect financial results (Adhikari et al. 2004; McBride and Key, 2003; Morgan and Langemeier, 2003; Mishra and Morehart, 2001). In contrast, although there is some evidence that the characteristics of the operator influence his/her ability to maximize the financial performance of the farm, the findings in the existing literature are mixed. Moreover, the above-cited studies are based on U.S. data as there is very little literature on this subject concerning hog farms in Canada.

This analysis provides some empirical evidence on the impact that the characteristics of a farm and of its operator have on its financial success. The results of such an analysis will enable hog producers to make more informed decisions. They may also give policy makers some indications as to the actions to be taken in order to maximize the effectiveness of government support programs for hog production.

In accordance with the commitments made by the government at the signing of international commercial agreements, the goal is to apply support not on a product unit basis, but rather on the overall income of farms. In that policy context, studying the parameters that influence overall income becomes a necessary tool. This study also seeks to propose useful avenues for future analyses.

Further Information

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December 2006

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