Playing By New Rules

U.S. sow numbers have steadily declined since the nightmare markets of '98. But, the Canadian sow count in January registered a 4% upswing.

The contradiction between Canada's expansion and the U.S. contraction has left pork producers and industry prognosticators bewildered. Are U.S. and Canadian producers playing by the same rules?

Searching for answers, National Hog Farmer turned to four of the U.S. pork industry's preeminent agricultural economists: Iowa State University's John Lawrence and Gary May, and the University of Missouri's Ron Plain and Glenn Grimes.

To help explain the enigma, Lawrence and May recount marketing and production trends for the past decade. Reductions in the U.S. breeding herd between 1994 and 2003 lopped off about 18.5 million market hogs (Figure 1). But, consistent improvements in sow productivity added back about 18.2 million hogs in the 10-year tally.

Now, add in about 6.5 million Canadian feeder pigs and slaughter hogs, plus a steady increase in average carcass weights, from 185 lb. in '94 to nearly 200 lb. in 2003, and it's easy to see that the composite represents a net increase in total U.S. pork production of about 13% (roughly 2.287 billion pounds), says May.

“It's important to recognize that we are dealing with a lot of different variables,” Lawrence explains. “One is capacity. Two, we haven't talked about what has happened to pork exports or imports. Three, how would producers have reacted if there hadn't been Canadian hogs coming in and pressuring prices? Would we have cut the sow herd as much? As an economist, I might argue that where we ended up is where we would have been anyway — just for different reasons.”

USDA data shows the productivity growth in the last five years has averaged over 3% (Table 1). Canadian pigs contribute another 1% for a total annual production growth of 4%. “If you look at long-term demand growth, it looks like the world wants U.S. hog farmers to produce about 1.5% more pork per year,” says Grimes. “That means we need to downsize our sow herd about 2.5% per year just to stay in balance — and we're not cutting back that much.”

Look at the Big Picture

What's driving Canadian sow herd growth, even as the U.S. dollar has weakened?

The April pig crop report from Canada notes that farrowings were up 8.2% in the first quarter of 2004, and producers were planning to farrow 6.4% more sows in the April-June quarter, reports Grimes.

“These things take time to slow down,” says Lawrence. “Maybe they are just responding to the market for (feeder) pigs. We're still sending a signal to Canada that we need large groups of high-health pigs, and will pay $30 or more for them.”

A portion of this market has developed as Iowans have reduced farrowings by 30% in the last 8-9 years. Currently, about 53% of the pigs finished in Iowa (14-15 million) come from Missouri, Nebraska, North Carolina and Canada.

“There's no question that the Canadians are filling a void created by the demise of the U.S. feeder pig industry,” declares Grimes. But, he adds: “Unpublished studies from the University of Missouri do not support that a high percentage of feeder pigs were purchased under a marketing contract.”

“If you want to look at the really big picture, I think you need to talk about the North American market — not the U.S. market or the Canadian market,” emphasizes Lawrence. “The cheapest, most efficient place to slaughter and process pigs is in the U.S. We have cheaper labor and larger, more efficient packing plants. To get the pork to the dock in Tokyo, it's still cheaper to finish them in Iowa, slaughter them in Iowa, and ship the product from Iowa.”

Studying Figures 2 and 3, Plain says it's apparent that Canadian pork producers have a more steady productivity pattern than the U.S.

Figure 2 shows U.S. production hit its lowest point in July, then climbed to its highest point in November. These swings were caused by seasonal infertility and seasonal hyper-fertility patterns in the U.S. breeding herd (see related story, page 16). “Now look at Figure 3. The Canadians don't have near the seasonal impact that we do,” Plain adds.

Unclear Signals

“The answer to the question about why Canadians are expanding may simply be that they are still getting a competitive return on investment,” observes May.

Or, it just may be that the newer, healthier Canadian sow herds are more efficient. Using pigs/sow/year (p/s/y) as the measure of efficiency, Lawrence says: “On a sow farm, just about everything is a fixed cost. Even sow feed cost is basically fixed, because you have to feed her for the whole year. If instead of 19 p/s/y, you now get 20 p/s/y, that's a 5% reduction in costs.”

Finishers, on the other hand, think in terms of short-term gains or losses. Pig prices are tied to futures prices and the potential for profit. Each new group offers a new opportunity for profit.

“Whether it's pressure from lenders or pressures of reality, they have cash flow payments to make,” says Lawrence. “Empty buildings do not make debt payments. Economic theory says that as long as you're covering your variable costs, you'll continue to produce, because there's at least some return to your fixed cost or overhead.

“If I own the buildings and provide my own labor — kind of the traditional role — then anything that is over my feed bill, vet bill, trucking, etc., is money in my pocket.

“If I am a contractor, I've got to pay $34/pig space (per year). I've got an incentive to put as many pigs in there as I can, because I've got to pay that $34 anyway,” he adds.

Good News, Bad News

It's tempting to speculate that the U.S. market would be stronger without the influx of Canadian pigs, but for Lawrence, it serves as a starting point for discussion.

“We could use the flexibilities we use for forecasting, about 3-to-1, and say we would have 6.5-7% fewer hogs; therefore, we would expect about 21% higher prices. That gets everybody's eyes to light up, but one of the underlying rules within trade is to ‘do unto others as you would have them do unto you.’ So, you block your border to anything coming in, and guess what, you don't get to ship anything out. With no imports and no exports — how big would this industry be?” he asks.

“Thirty years ago, when a hog producer went out of business, the production went away,” says Grimes. “Today, an operation files bankruptcy, but someone else buys it and it stays in production. What needs to happen is what's happening; more production has to be eliminated. I see no other way to do it with our system.”

For a glimpse at the next five years, Grimes suggests: “Look at the corn prices we have with a record crop last year, and look at what the Energy Bill, if it ever passes, will probably do to corn demand. Rather than looking to $2.00-2.25 corn, we think it will be at $2.75 to $3.00, at least. Remember, for each 50¢/bu., on corn, you're roughly adding $2.50/cwt. to the cost of producing hogs. If we go to $2.75/bu., you're talking about adding $3.75/cwt. to your costs.”

“I think the odds are low that the Canadian factor will go away,” says Grimes. “We have no choice but to try to get better. There are pressures, not only from Canada, but Brazil. Five years from now, we might be more concerned about them than the Canadians.”

“Brazil has replaced Canada as the fastest-growing hog-producing country,” adds Plain. “They've been moving up very fast on both exports and production.”