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Western Canada Well Positioned to Recover from Low Hog Prices

by 5m Editor
24 November 2007, at 10:37am

CANADA - Swine producers in western Canada are being encouraged to focus on their natural competitive advantages as they plan strategies to ride out the current economic storm facing the entire Canadian livestock industry.

Perfect Storm Reduces Profitability in Canadian Swine Industry

The Canadian swine industry is facing what has been described as “a perfect storm” as a combination of factors have come together to drive down profitability.

George Morris Centre senior market analyst Kevin Grier observes, Canadian producers are being caught on cost side with high grain and other input costs and on the revenue side due a relatively inefficient packing sector compounded by the rapid erosion in pricing as a result of the appreciation of the Canadian dollar.

“Start off with grain prices,” he says. “Not just the fact that grain prices are high but the relative spread, or difference between our grain cost per head and the American grain cost per head.”

He says the fact that our grain prices are higher than the American prices gives us a competitive disadvantage, let alone the fact that grain prices are high overall.

Grier’s second point of concern rests with the inefficiency of the Canadian packing industry which further reduces producer returns and the rationalization that has gone on over the last few years.

“You’ve got cost, prices and then the overall swamp of the appreciation of the dollar.”

Canadian Producers Not Alone in Contending with Losses

Big Sky Farms CEO Florian Possberg agrees, “What we’re seeing is that Canadian hog producers are severely stressed now but we’re not alone.”

He says, “If you look at the rest of the globe, whether it’s Europe or Australia or Africa or Canada, we’re really a hurting industry.”

He observes, with the exception of the United States and China, many other countries are seeing much the same situation and he anticipates we could see up to ten percent of the sows disappear in the non-U.S. non-Chinese pork production industries.

Possberg suggests “That’s going to lead to quite a contraction of supply and we know what happens when there’s a shortage of supply, prices go up.”

Pork Industry Seeks Assistance

The Canadian Pork Council has requested assistance from the federal government in the

form of a more responsive Canadian Agricultural Income Stabilization Program (CAIS) with more timely payouts and a short term loan program to help bridge the deficit between the cost of production and what is received in the market place.

Saskatchewan Pork Development Board (Sask Pork) general manager Neil Ketilson explains, “We have a farm safety net program out there already that’s in existence, the CAIS program. We’re really concerned that that program is not as effective, as transparent and as timely as it should be. We need to put some renewed emphasis and action into that thing so we can get payments into people’s hands a lot quicker than what it is.”

He adds the second request is for a short term cash injection through a loan program that would be repaid once the industry returns to profitability.

“In Saskatchewan we’ve got two examples. We had a program in 1998 and another one in 2002 and what it did was give producers the difference between the long term average prices, about 140 dollars, compared to what the current market prices is. They would be eligible for a loan on the difference.”

Western Canada Well Positioned for Eventual Recovery

Possberg is convinced western Canada is better positioned to take advantage of the recovery when it does come than some of its competitors.

“In the future we are going to see some places that produce livestock not being in a good

position because of lack of water, lack of feedgrain supplies, lack of infrastructure.”

He believes once producers make it through this next period, the factors that fueled expansion in western Canada two or three, five, ten, 15 years ago will again come to bear.

Grier agrees, “There are numerous advantages that western Canada has relating to hog densities, or lack there of, compared to competing jurisdictions around the world, arable land, water, lack of disease, sow productivity. All of these things are advantages that are fundamental to the prairies that we have to keep our eyes on.”

He is believes, “The reason the industry grew was because of these fundamental advantages and, once we get past these very very difficult times, those will be the advantages that will bring us back into an area of re-growth.”

Western Canada’s Competitiveness with U.S. Considered Critical

However Grier acknowledges, the real test is how western Canada will compare with the United States.

“As of now, the U.S. has been profitable for 45 months or so and the prairies have seen losses in about 19 of 45 months so we have not been profitable relative to the United States and it’s going to take a long time before we get there.”

Compared to the rest of Canada, he believes, the prairies have a lot of advantages but the thing that matters is how we compare to the United States.

Ray Price, the president of the Sunterra Group also worries about western Canada’s competitiveness compared to the U.S.

“We might see a little bit of profitability in Canada in the middle of summer next year but the Americans are only going to lose out on about two months of profitability again for the next 18.”

Price doesn’t foresee the value of the Canadian dollar going down anytime soon and he questions how Canada will survive on minimal profitability while the Americans continue to make good money.

He stresses it’s about profitability not about losses.

“Profitability is in the States, it’s not here and the U.S. is where we compete and who

we compete with. That’s fundamentally the problem.”

Prairies Likely to Gain Larger Share of Canadian Production

Grier notes, while there has been a loss of packing capacity across Canada, the prairies will either come out of the restructuring with a capacity similar to what it had prior to the rationalization or even more depending on whether certain plants come through.

He admits, it’s hard to look at a crystal ball right now and say that western Canada will have more of a shift and bigger numbers. Right now we’ve got huge hurdles to go through and how long those hurdles are in place is really anybody’s guess.

“Relatively speaking, the prairies will probably have a greater share. Whether in absolute numbers, I really can’t say, but in terms of the share of the Canadian market the prairies will probably come out ahead,” he says.

Canadian Pork Industry Still Worthwhile

Grier is convinced the industry is worth keeping.

“It’s a potentially strong industry and it’s just a matter of getting past these exceptionally difficult times, probably the worst the industry has ever seen but, again, it’s got the solid base to build on.”

5m Editor