Sporadic economic gains and losses, coupled with a labor shortage and uncertainty in the packer segment, present huge challenges to the Canadian pork industry.
Prior to the last couple of years, when U.S. pork producers read or heard anything about the Canadian hog industry, it was typically about increasing hog shipments across the border.
Over the last two years, however, most of the hog-related news from Canada has been about problems, challenges or difficulties.
Today, U.S. producers still see, and are somewhat irritated by, increasing live hog imports from Canada. Unlike the past, however, U.S. producers understand that the increased exports are a result of those problems and challenges, not related to subsidies or unfair advantages.
In fact, while U.S. pork producers have enjoyed over three years of uninterrupted profitability, their Canadian counterparts have seen sporadic profits followed by losses.
Today, the Canadian hog industry faces a litany of issues, including feed costs that are out of line compared to the United States, uncompetitive packing plants, labor shortages, disease challenges and restrictive environmental regulations. News from Canada has included lengthy labor disputes, plant closures, producer attrition and lower production.
As Figure 1 shows, the Canadian herd began a slow decline two years ago; however, it has done nothing to slow the advance of live hog shipments into the United States.
Figure 2 shows the pace of Canadian live hog exports to the United States from 1994 through the first quarter of 2007. This growth in exports is symptomatic of many of the Canadian problems. Slaughter hog exports are increasing due to labor shortage and an inability to keep hogs away from U.S. packers. Likewise, weaner and feeder pig exports are accelerating due to strong Iowa demand and more competitive feeding conditions in the U.S. hog belt.
Industry Strengths, Weaknesses
Before discussing the current challenges facing the pork industry, it is worth noting that Canada remains a global leader in pork exports and is one of the largest pork producers in the world.
Canada has huge competitive advantages related to exceptional production capability and a comparatively small population. Access to the world's most lucrative market, the United States, doesn't hurt either. Some of those competitive advantages include:
Greater availability of fertile arable land relative to human and animal requirements; arable land/person is nearly double that of competing nations, such as Argentina, Brazil and the United States.
A climate that is conducive to hog production efficiency.
Less intrusive production. Most of the industry has a mature and efficient production and marketing infrastructure and logistics system.
Abundant and clean water.
Better animal health.
Extraordinary grain production capability.
Management and entrepreneurial foundation of the industry that is proven and successful.
A scientific and research base that is renowned as a world leader.
Diversified export markets. Canada exports to over 100 countries and is increasingly less dependent upon the U.S. market.
A pork export demand that has grown rapidly, while domestic demand has been stable.
One of the results of those advantages relates to the productivity of the industry. According to PigChamp data, live born pigs/litter in Canada exceeds the United States by about 5%, and pigs weaned/litter exceeds the United States by about 10%.
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With those positives, it is also worth noting that the Canadian hog and pork industry is struggling with competitive tests throughout the supply chain. Some of those key challenges include:
Declining feedgrain acreage.
Lagging feedgrain productivity relative to the United States.
Higher cost of feedgrains relative to the United States.
Higher cost of feeding hogs relative to the United States.
When all the components of production are compared, it is reasonable to assert that a typical prairie province hog operation could have total costs that are C$5.00-8.00/head (US$4.50-7.20/head) higher than its counterpart in the U.S. Midwest, based on the George Morris Centre cost of production model. The situation would be just as difficult in Ontario or eastern Canada. This differential, in turn, plays a material role in lagging hog production profitability between Canada and the United States.
The increased use of corn for ethanol production in the United States has become the single largest driver of the rapid rise in corn pricing in North America. This in turn, naturally, has major ramifications for the hog industry.
The subsidies to the U.S. ethanol industry, relative to supply and demand, could result in stronger pricing relationships in the United States compared to Canada. At this point, it is too early to know whether the relative supply-demand changes will be enough to eliminate or narrow the Canadian feed cost disadvantage.
Furthermore, if the Canadian government increases subsidies for Canadian ethanol, this in turn could erase the U.S. demand-supply price increase relative to Canada.
The Canadian pork packing industry is currently the focal point of industry competitiveness. The sector is in the midst of large-scale rationalization and restructuring.
In order to understand why this is occurring and where the industry is likely heading, it is necessary to understand some of the main drivers in the industry. Key characteristics that determine success or failure of pork packing plant operations include scale economies, plant location/utilization, labor costs, hog slaughter weights and credits.
The following provides a good outline of relative plant sizes between Canada and the United States:
Average capacity: 3,200 head/day.
Five largest Canadian plants: 8,400 head/day.
Three of the top 29 are > 40,000 head/week.
Average capacity: 13,000 head/day (nearly four times greater than in Canada).
Five largest U.S. plants: 21,000 head/day (2.5 times greater than the top five in Canada).
Twenty of the top 29 plants are > 40,000 head/week.
The main message of this data reinforces that Canadian plants or line speeds are much smaller or slower than in the United States.
Table 1 offers another perspective on the same factor. Plant size is an important consideration because economic research, as well as statistical analysis and basic cost accounting, have consistently shown that larger plants have lower costs/head than smaller plants.
It should be noted that academic and government research into economies of scale and size are more plentiful in the United States.
In larger plants, direct and indirect costs are spread over larger numbers. Of course, there are limits, but the practice consistently results in lower labor costs in larger plants. According to the George Morris Centre, USDA and other academic research, costs can be C$2.00-5.00/head (US$1.80-4.50) lower for large plants (1,000/hour) vs. small plants (300-400)/hour.
Double shifting is important for similar reasons. Indirect costs such as administration and depreciation are spread over a larger number of hogs, and assets are generally more fully utilized. All major U.S. plants are double shifted, whereas in Canada, only two very small plants in Quebec have been double shifted. According to the George Morris Centre data research, Canadian plant costs are at least C$3.00 (US$2.70) higher than U.S. plants due to a lack of double shifting.
Essentially, Canadian plant costs are likely to be at least C$5.00/hog (US$4.50/hog) higher than in the United States because they are smaller and not double shifted. Anecdotal information from Canadian packers suggests that the U.S. advantage is likely closer to C$8.00/head (US$7.20/head) due to smaller sizes and a lack of double shifting.
The Canadian pork packing industry appears to be at a competitive disadvantage across a range of critical success drivers. There is little doubt that there are real, measurable weaknesses facing Canadian packers for each of the competitive drivers.
For the industry as a whole, a conservative estimate of the disadvantage would be at least C$8.00/hog (US$7.20/hog), but more likely over C$10/hog (US$9.00/hog).
Canadian livestock production and packing is facing a mounting labor shortage. This shortage has been brought on by many factors, including an aging work force, a dramatic reduction in local youth enrolling in agriculture-related programs/farm careers, and an inability to compete in the labor market with other sectors. This new labor environment is directly impacting hog production and packing from coast-to-coast.
The Canadian pork packing industry faces many challenges, but the lack of labor is arguably the most significant. Depending on methodology, it is very straightforward to assert that labor availability is costing the Canadian pork packing industry C$600 million to $1 billion/year (US$540 million to $900 million).
Furthermore, when the packing industry suffers due to this or any other challenge, the ramifications are felt directly by producers as well.
The appreciation of the Canadian dollar has had an impact on Canadian packers in two ways. First, it has modestly reduced gross margins. This is due to the fact that appreciation has reduced pork cutout revenues at a slightly faster rate than it has reduced hog costs. And operating cost competitiveness relative to the U.S. competition has also been impacted.
The appreciation of the Canadian dollar resulted in a dramatic escalation in operating costs in terms of U.S. dollars. This means that, strictly due to appreciation, common plant costs that may have been competitive at a 65-cent U.S. dollar conversion became uncompetitive at the 85-90-cent dollar conversion.
The challenges at the packer level are manifested in many ways, but one of the more obvious relates to Canada's pork export performance.
Figure 3 shows Canadian pork exports to the United States and U.S. pork exports to Canada. Not only are Canadian exports to the United States declining, but the United States is becoming more of a presence in the Canadian market.
In essence, the U.S. industry is taking inexpensive weaner pigs from Canada, adding value, then shipping the pork back to Canada.
While the challenges are many and difficult, the Canadian advantages ultimately mean that the industry can, and likely will, continue to be a world leader and a strong competitive presence. Within that optimistic context, however, the key challenge relates to feedgrain and packer competitiveness.
The Canadian agricultural industry needs to address lagging productivity in feedgrains and its resulting pricing disadvantage relative to the United States.
In addition, the packing sector must undergo a restructuring to better compete in world and domestic markets, particularly against the United States.
The likely result will be a period of accelerated attrition in producer and packer operations for the next five years. Within that difficult period, however, the industry remains poised to continue to grow, compete and succeed, domestically and internationally.
|Avg. daily capacity, hd||13,000||3,200||2,700|