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Pork Commentary: Lean Hog Prices Pop Over 60 Cents!

by 5m Editor
10 April 2007, at 11:01am

ONTARIO - It is good to see the Iowa-Minnesota lean price get back over 60¢ lean last Friday’s average 61.89), writes Jim Long. It was the first time over 60¢ lean since March 2 (Friday).

Let’s face it – if we are going to get to the mid 70’s or touch the 80’s this summer, it’s a good idea to first get over 60. US slaughter last week was distorted by the Good Friday and Easter holidays, but still came in at 2.035 million, 22,000 more than the same week a year ago. Still lots of hogs and the big question in many minds, “Is slaughter going to continue significantly over a year or drop back to even as the US March Hogs and Pigs Report indicates?”

We believe slaughter levels will decline, more in line with the Hogs and Pigs Report. Our rationale is that we do not see any reason for production to sustainably jump as it has. Maybe not a solid reason, but that’s our story.

London Swine Conference

This past week attended the London Swine Conference. Our report:
  • One of the keynote speakers was Kevin Grier from the George Morris Centre. Mr. Grier spoke on Canada’s pork industry’s competitiveness, or more relatively to Canadian producers, the loss of competitiveness to the US.
  • One factor pointed out was comparing Iowa corn yields to Manitoba barley yields. When you compare 1985-87 yields to 2004-06 average yields, Iowa corn yields have increased 30.7%, while Manitoba’s barley yield has increased 3%.
  • In the past, Manitoba’s barley was at a discount to Minneapolis corn. Currently, barley is at a premium. Barley has about 85% of the feeding value of corn.
  • This yield and price difference goes back to the lack of intensive research underway to increase barley yields by large corporations due to the lack of Canadian patent protection in barley varieties. Corn is protected and look at the yield increases from scientific development. If Canada wants to stay competitive in barley production (pork) you sure wonder if this policy should be reviewed.
  • A competitive advantage for Canada from assessing Pig Champ data since 1998, Canada has averaged weaning 2.77 pigs per year more than the US. Better genetics? This is one of the drivers in the increase of small pigs from Canada to the US.
  • Canada’s two major packers have had well documented challenges to achieve sustainable profitability. Maple Leaf and Olymel and other Canadian packers are faced with several disadvantages according to Mr. Grier.
  • One factor is the average size of plants. With Canada’s plants having an average capacity of 3,200 and the US 13,000, Mr. Grier projected that the Canadian smaller capacity (also due to the lack of double shifting) was increasing Canadian plant costs to $5 per hog higher than the US.

Some other compounding factors:

  • Canadian plant utilization has been declining in the last three years (more small pigs and market hogs going to the US).
  • Wage rates in Canada result in a cost disadvantage of at least $1 per hog.
  • Lower hog weights in Canada result in a cost disadvantage of about $1 per hog.
  • US packers receive up to $1 per hog more in inedible by products.
  • Exchange rate changes added possibly $2.50 per hog disadvantage to Canada. In summary, add them up and you have a minimum $8.00 per head US advantage. It is no wonder Maple Leaf wants to close its smaller Western Canada plants and double shift their large modern Brandon plant to 16,000 head per day. Really, they have to for competitive reasons. In the end, it’s to all Canadian producers’ benefit to have low cost efficient plants.
When you look at higher packer costs in Canada and the recent trend to higher feed costs in Canada compared to the US Upper Midwest, the small pig export story is simple to see. The economics of finishing in the US is just better. In the foreseeable future, we do not see this changing.

Other Observations

  • Lots of speculation that Burlington Ontario’s Maple Leaf plant will not find a buyer, but that it will be sold maybe for a shopping centre. If that was to happen, 40,000 plus in weekly slaughter capacity could be lost. This would push more small pigs and market hogs to the US.
  • One intriguing story that we heard was the producers of Ontario approaching Triumph Foods in the US to joint venture purchase the Maple Leaf Burlington plant. Ontario producers have significant equity and capital resources. Triumph has proven their ability to run plants, work with producer partners, and obtain retail shelf space with their marketing arrangement with Seaboard Foods. Triumph’s unique hog purchase agreements minimize banker loan risk at the plant level. Burlington is close to the Northeast US market. Canada exports half of its pork production. A US based marketing group would help initiate and sustain US relationships.
  • Feedback on circo virus vaccine is all positive. One producer with several thousand sows called it a miracle. Their mortality has declined over 10%. A speaker at the conference in a discussion pointed out that in some production systems, circo vaccine is not working as well. Their problems were far greater than circo. Circo is now the excuse for all things that go wrong in the barn (taken the place of PRRS?). Other diseases and poor management are still major problems.
  • We did not pick up expansion talk from any of the Ontario or Quebec producers at the conference. Indeed it appears to us that the Canadian sow herd is declining (Ontario and Quebec approximately 850,000 sows total). High feed costs, lack of labour, packer sustainability issues, disease (circo) and price of hogs (low) are all factors that are decreasing the sow base. People get worn out by all of these issues. It takes really special personalities to want to do more in the face of these brutal facts.
  • Now throw in US Country of Origin Labeling legislation as one more reason weighing on future hog pricing in Canada. It’s not hard to see why there will be fewer hogs before there will be more.
  • Heard an interesting point from one of the speakers. Pork Powerhouses are talking about expansion. But when asked when, the answer is in the future – not now. All production issues, and especially labour wear on people. It’s every day, all of the time. One of the reasons not to have more is the huge everyday challenge of running what they already have.

Take Home Message

There will be no more sows in Canada. There will be more small pigs go to the US. Ontario and Quebec producers have big shackle problems unless Maple Leaf and Olymel issues get worked out. No expansion is positive for sustaining profitability for the North American pork producer.

5m Editor