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COOL Fallout Hits Canadian Producers Hardest

As promised last week, this week’s topic is mandatory country-of-origin labeling (COOL) and its impact on the U.S. and Canadian pork sectors.

While not the “worst of times,” I think a par-plus Canadian dollar wins that award in spades. COOL is not a good development for Canadian producers. In the long run, I don’t believe it is a good development for U.S. producers either, especially if it precipitates a trade action by Canada and all of the ill-will that will engender.

Mandatory COOL seems to be playing out much as I expected. A few U.S. packers will not purchase pigs with any Canadian ties. Most notable among those is Smithfield Foods and its midwestern subsidiaries, John Morrell and Farmland. Vertically-integrated Triumph Foods and Seaboard Foods will not buy Canadian-sourced pigs and neither will Hatfield Quality Meats nor Indiana Packing. The other companies among the top 10 U.S. slaughter firms (Tyson Foods, Excel, Swift, Hormel Foods and J.H. Routh) all plan to slaughter Canadian-sourced pigs. Only Tyson has said it plans to slaughter Canadian market hogs, however. The top 10 companies account for 88% of all U.S hog slaughter capacity.

The U.S. packers that have decided not to take Canadian-origin pigs have done so for, I think, one or more of these reasons:

  1. They don’t need them. That might mean they haven’t needed them in the past or that they believe they can find U.S.-origin pigs easy enough to adjust.

  2. They think that not buying Canadian-origin pigs will force the Canadian sector to contract, thus driving up pig prices.

  3. They want to avoid the costs of duplicate stocking units (sku), segregation, logistics, etc. that buying pigs with Canadian ties will allow.
The packers that plan to use Canadian-origin pigs may believe any or all of those reasons, too. They have just decided that the reasons are trumped by the economic realities of large plants with high fixed costs that require high throughput. They will, consequently, find a way to efficiently use at least some Canadian pigs.

Under the original 2003 mandatory COOL rules, product from any pig with a Canadian tie could have carried the same label, simplifying the segregation process. Not so under the most recent set of rules. Products from pigs born in Canada and raised and slaughtered in the United States will carry a “Product of the United States and Canada” label. Product from pigs imported from Canada for immediate slaughter (i.e. born and raised in Canada) will carry a “Product of Canada and the United States” label.

The class that is most in question is Canadian market hogs shipped to the United States for slaughter. As can be seen in Figure 1, that number has dropped from 3.28 million head in 2007 to a projected volume of just under two million head this year. The weekly numbers (Figure 2) have been falling all year, but they have moved sharply lower since Oct. 1, when the rules went into effect. Further, the drop in market hog imports has coincided with a noticeable increase in Canadian hog slaughter (Figure 3). Canadian slaughter during the five weeks prior to COOL’s Sept. 30 start-up had averaged 205 head/week less than one year ago. The five weeks since then have seen those numbers rise to 11,504 head/week more than one year ago. Imports of these hogs could be headed to zero. I don’t see any way for packers to handle three labels efficiently.

I think the real question is what will happen with Canadian weaned pigs and feeder pigs? Those numbers (Figure 1) are about even with last year. The weekly data trended downward early this year, but have recently been in the 110,000 to 120,000/week range. Currently, there is a lot of interest on the part of U.S. finishers in securing sources of U.S.-born pigs. That has understandably put negative pressure on prices of Canadian pigs. Much of this shift, though, is based on fear of the unknown – just how will U.S. packers play this thing out? Will there be problems when USDA’s six-month “education” period ends March 30, 2009?

The ultimate answer will be two-fold. First, how will U.S. consumers react to the “Product of the United States and Canada” label? My guess is that U.S. consumers will not mind that at all. We have a pretty positive view of things “Canadian” and I’m sure the product will not be visibly different from U.S. product. This will probably not be the case for the beef industry, where there will be countries other than Canada added to the list. I think U.S. consumers’ views of labels including Mexico, Uruguay, Brazil, etc., will be somewhat more negative.

Second, how will the logistics work out and what will be the ultimate costs of segregation, additional skus, etc.? That will be highly dependent on how much of the product can be merchandised through exports and foodservice where it does not have to be labeled. It will also depend on any technological solutions that can be brought to bear. For example, will labeling application, bar-coding or some other technology be developed to make the multi-label solution less onerous? My guess is yes. Necessity is still the mother of invention, and anyone who has been through modern packing plants knows that these people can be pretty clever with machinery.

Again, COOL is certainly not a good thing for Canadian producers. It is worse for those who are currently shipping market hogs to the States. At present, it is certainly bad for sellers of weaned pigs and feeder pigs, but I think that will get better when the fear factor subsides a bit. COOL will benefit Canadian packers and the product from any pigs left in Canada, by COOL restrictions, will still compete directly with U.S. product either in the U.S. market or an export market common to the United States and Canada. In the long run, that will be bad for U.S. producers, too.

But this whole thing is better for Canadians with the loonie (Canadian dollar) at $0.80 or even $0.85 than it was at $1.02.




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]

Boehringer Ingelheim Calls For PRRS Research Proposals

Boehringer Ingelheim Vetmedica, Inc. (BIVI) is again seeking research study proposals to focus on porcine reproductive and respiratory syndrome (PRRS) – one of the swine industry’s most devastating diseases.

BIVI has contributed $75,000 annually for the last six years through its Advancement in PRRS Research Awards, which funds three selected research programs.

The PRRS research program is open to swine veterinarians, diagnosticians and public or private researchers in the United States, Canada and Mexico to study new ways to diagnose, control and eradicate this costly swine disease.

Research proposals must be submitted by Jan. 1, 2009, and awards will be presented at the March 2009 American Association of Swine Veterinarians annual meeting in Dallas, TX. Proposals are selected by an independent review board based on established criteria including potential economic impact to the swine industry, originality and scientific quality and probability of success in completing the year-long study.

The 2008 Advancement in PRRS Research Award recipients included Jim Lowe, DVM, Carthage Veterinary Service, Carthage, IL; Paul Yeske, DVM, Swine Vet Center, St. Peter, MN; and Scott Dee, DVM, University of Minnesota, St. Paul, MN.

To participate in the research program, submit a proposal, cover sheet, Curriculum Vitae and two letters of recommendation by Jan. 1, 2009 to:

Boehringer Ingelheim Vetmedica, Inc.
Attn: Trudy Luther
“The Advanced PRRS Research Award”
5506 Corporate Dr., Suite 1600
St. Joseph, MO 64507-7752.

For more information and complete submission instructions, visit www.PRRSresearch.com.

New Approach May Be Needed to Fuel Exports

U.S. Meat Export Federation (USMEF) President and CEO Philip Seng says the new administration should be prepared to try a new approach to improving trade relations with key U.S. export markets, and not shy away from using different tactics to achieve results.

While U.S. pork exports have excelled so far in 2008, he cautioned attendees at USMEF’s annual strategic planning conference recently in Denver, that coming months might see fallout from the softening global economy.

With eight months of export data, U.S. pork exports have already set a 17th-consecutive annual record in 2008. Through August, pork exports were up 71% in volume and 64% in value over 2007, and set a new, single-month record with $452 million of pork exported in July alone.

However, with the expected lull in sales, it’s up to the industry to “create our own weather,” says Seng.

“Red meat exports are one of our avenues to prosperity,” he reports. “While there are countries suffering from depressed economies and devalued currencies, people in Japan, for example, have $5.5 trillion in personal savings, and banks in Japan and China have $1.5 trillion and $1.9 trillion, respectively in foreign currency balances. Our export industry could take a page from Willie Sutton who, when asked why he robbed banks, replied ‘Because that’s where the money is.’ The money is in these key export markets.”

To help bolster meat exports, Seng recommended the new administration consider several steps:

Create a new sub-cabinet level position with responsibility for all trade-related issues to drive USDA’s export agenda through trade negotiations and promotional programs.

Redefine the industry-government partnership. Closer consultations between the Agriculture Department and its cooperators could have facilitated the reopening of international markets after the mad cow disease announcement.

Try a new approach to funding export market development. Launch an export initiative that would be used solely for collecting and administering funds to develop international markets. Exporters would contribute these funds to USDA, which would allocate them in combination with USDA funds to export industry groups based on their performance.

Ensure that political appointments are based on credentials. Too often, these appointees lack international experience, resulting in problems in reopening markets to U.S. exports, and in working with trade partners in general.

USMEF Leader Stresses Communication
Jon Caspers, new chairman of the U.S. Meat Export Federation (USMEF), is focused on improving communications with the wide range of producers and industry sectors that comprise the USMEF.

“We have to continue to tell the story of trade and inform producers all across the country about how it influences their bottom line,” he explains. “We have a great story to tell. But we just have to make sure they’re informed about that because the ongoing support for the activities that really build this industry – that really build trade – comes from them.”

Caspers operates a 13,000-head, nursery-to-finish hog operation in Swaledale, IA. He says U.S. agriculture must continue to recognize the benefits of trade because it represents such a key part of the agricultural industry and the national economy.

“The overall trend of trade making up a bigger part of the economy is absolutely going to continue,” he says. “If we step back from that or falter, we’re going to lose. We need to continue to promote exports and participate in those markets, because it’s only going to speed the recovery here and across the globe.”

Indiana pork producer Danita Rodibaugh was named secretary-treasurer of the USMEF. Her family produces grain and purebred hogs near Rensselaer, IN.

U.S.-Canadian Exchange Rate More Balanced

“It was the best of times. It was the worst of times.” So began Dickens’ “A Tale of Two Cities.”

While today doesn’t actually represent either the best or worst times for Canadian pork producers, it certainly presents two very opposite, but simultaneous, occurrences – a weaker Canadian dollar and mandatory country-of-origin labeling (COOL). I’ll address the exchange rate this week and gladly put off the mandatory COOL discussion until next.

The weaker Canadian dollar has provided a virtually instantaneous increase in prices received by Canadian hog producers relative to their U.S. counterparts. That is not to say that prices are good in Canada. They just have not fallen nearly as much as they have in the States. The simple reason is that a weaker Canadian dollar (i.e. more $Can needed to make one $US) translates a given U.S. price into more Canadian bucks.

Figure 1 shows historic weekly hog prices for the United States and Canada (restated to $US/kg). I use Ontario prices simply because all Canadian prices are highly correlated and the Ontario prices were usually within the range of the other provincial prices. I could use any Canadian price series and make my point because in recent weeks, Canadian prices have stayed constant while U.S. prices have fallen sharply.

This is no panacea, however. The weaker Canadian dollar also increases the cost of any inputs whose prices are determined by the U.S. market. Therefore, most feed costs have increased relative to those of U.S. producers. However, only about 60% of Canadian production costs are tied to U.S. prices, so Canadian producers win as virtually all of their income grows and only a portion of their costs grow. That is the flip side of the forces that have hammered Canadian producers since the loonie (a nickname for the Canadian dollar; the coin has a loon on it) began gaining value back in early 2003.

A further benefit of a weaker loonie is just now being felt as Canadian product is more competitive in world markets. The cheap U.S dollar has provided a pricing advantage to U.S. exporters for some time. The rising dollar and, especially, the falling loonie, make Canada’s products relatively better buys. I understand that Canadian sellers are making substantial gains in Japan and China where currencies have gained more relative to the Canadian dollar than to the U.S. dollar.

I have also divided Figure 1 into three pretty distinct periods. The first, 2002 through most of 2004, was characterized by relatively high prices in Canada that were trending back toward U.S. prices as the Canadian dollar gained about 25% in relative value. Canadian breeding herd growth peaked at 7.6%, year-over-year, in January 2002. The first year-over-year decline in nine years occurred in April 2005 – shortly past the end of the red-boxed period.

The third period (blue box) runs from the beginning of 2006 through the third quarter of this year. It is characterized by low Canadian prices relative to U.S prices and a huge (12.9%) reduction in Canada’s breeding herd.

The other period (green box) is the one I find most interesting. From Q4-’04 through 2005, the exchange rate averaged $Can1.21/$US (or $US 0.82/$Can, if you prefer). During that period, Canada’s year-over-year breeding herd changes were +1.6, +1.0, -0.03, -0.7 and -0.3%. The year-over-year breeding herd change in the United States was less than 1% in either direction in all five of those quarters. I know there were many other factors at play, but it certainly appears that the U.S-Canadian pork industries might be more compatible at a ratio of about $1.20:$1.00, doesn’t it?

And look where we are now: Roughly $1.20:$1.00. That doesn’t mean things will be stable, since everyone is losing money at current feed and hog prices. But it does suggest that the signals may be more even-handed than they have been, thus allowing the two countries’ producers to move in tandem, perhaps, rather than in opposition.

So do you think we can get Ben Bernanke and Mark Carney (for U.S. readers, Carney’s the Governor of The Bank of Canada) to cooperate a little based on this evidence? Probably not, especially with the number of alligators both of them are fighting during the current financial swamp draining. But at least we have a bit of context in which to place our exchange rate and what has happened in the past to the U.S. and Canadian hog herds.




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]

Canadian Sow Cuts Are Sizable

Canada’s quarterly Hog Statistics report confirmed what many expected this week when it pegged the country’s breeding herd at 1.416 million head, 8.6% lower than one year ago. In addition, Statistics Canada revised its breeding herd data for January, April and July downward largely in line with levels that analysts and industry observers believe to be correct.

Figure 1 shows year-over-year percentage changes for breeding herds in Canada, the United States, and the two countries combined.

The original breeding herd estimates for January, April and July are represented by the X’s in Figure 1. As you can see, this month’s revisions are significant, especially for July where the year-over-year change went from -4.6% to -7.4%. That is not a surprise to readers of this column, as I questioned the July estimate when it was published in August. This number is much more in line with what I expected given the losses incurred by Canadian producers since 2005 and the ongoing breeding herd buyout program in Canada.

As of the September and October counts in the United States and Canada, respectively, the U.S. breeding herd is 160,000 head smaller than one year ago, while the Canadian herd is lower by 127,900 head. The 287,900-sow decline amounts to a 3.7% reduction in the combined breeding herd – still a relatively small cutback when one considers what would be required to drive prices high enough to cover higher production costs. Granted, the production cost increases do not appear to be as large as they once did, but my forecasts for U.S. costs based on futures market prices are still near $70US/cwt., carcass, for most of 2009.

The Canadian breeding herd is now 217,500 head smaller than it was at its peak in January 2005. The U.S. breeding herd is 172,000 head smaller than its most recent cyclical peak in December 2007. Again, the two combined herds are 287,900 head (3.7%) lower than at their combined peaks in October 2007.

Canada’s producers reduced farrowings by 3% in the July-September quarter but plan much larger reductions for this fall (see Figure 2). I would be surprised if actual farrowings fell by this much given the ability of producers on both sides of the border to increase efficiency in difficult times.

I discovered a curious practice on the part of Statistics Canada in this report – they do not publish farrowing intentions for two quarters forward in the April or October reports. I had never realized that before, so I inquired about the practice. Their polite reply: “We’ve always done it this way, but we will take a look at changing it.” That was a very reasonable response, especially when the respondent also told me that intentions for January-March (for which Stats Canada apparently gathered data but did not publish) were about the same as those for October-December. That number is reflected in Figure 2 as a roughly 5% reduction from January-March 2007 – far smaller than the planned reduction in the fall quarter.

Guarded Optimism
Are Canadian producers optimistic about 2009? I would say they are guardedly so, willing to take a wait-and-see attitude with feed prices falling. The same pattern (a smaller decline in two-quarters-forward intentions than for one-quarter-forward intentions) was apparent in the September U.S. Hogs & Pigs report.

The bottom line is: Reductions in breeding herds continue, but productivity gains will eat up much of the declines by the time pigs reach slaughter weight. A Canadian breeding herd that was 7.4% smaller on July 1 produced a July-September pig crop that was only 2.5% smaller (see Figure 3). That productivity increase is even larger than what the U.S. report indicated. It fits my expectations, though, since sow herd cuts have been deeper in Canada, leaving only the most productive farms and sows still active.

Based on the most recent pig reports from each country, I still expect 2009 Canadian-U.S. slaughter to be less than 3% smaller than 2008. That will not support prices enough to cover higher costs unless hog demand remains excellent. And we are seeing some problems on that front as both meat and byproduct values fall.




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]

Pork Checkoff, Partners Announce Pork Industry Scholarships

The Pork Checkoff, Pioneer Hi-Bred and PIC are awarding 19 scholarships to college students across the country as part of their strategy to foster human capital for the future.

“The development of human capital is one of the issues the Pork Checkoff identified as critical for the industry to address,” explains Steve Weaver, National Pork Board president. “Our service to producers includes ensuring there is a sustainable source of capable people ready to take on the industry’s charge of producing a safe, wholesome food product in a socially responsible way,” adds the California pork producer.

The 19 recipients come from 14 different colleges and seven different fields of study. The 2008 Pork Industry Scholarship winners include:

Recipient College or University Area of Study
Hyatt Frobose Kansas State University Nutrition/Behavior
Carrie Highfill Oklahoma State University Meat Science
Douglas Albright Kansas State University Nutrition
Emily Arkfeld University of Nebraska Meat Science
Kyle Baade South Dakota State Veterinary Medicine
Scott Baker University of Illinois Nutrition
Angela Black Ohio State University Ag Economics
Jonathon Ertl University of Minnesota Veterinary Medicine
Ashley Hop Redlands Community College (OK) Nutrition
Arthur Leal University of Arkansas Nutrition
Elizabeth Legan Purdue University Ag Economics
Neal Martin University of Missouri Veterinary Medicine
Jeremiah Nemechek North Carolina State University Nutrition
Stephanie Raney University of Missouri Behavior
Kate Richter South Dakota State Nutrition
Hannah Rothe University of Illinois Nutrition/Environment
Mitchell Schaefer University of Wisconsin-River Falls Nutrition
Trever Shipley Iowa State University Breeding/Genetics
Grant Tomsche University of Minnesota Veterinary Medicine

The top candidate, Hyatt Frobose, will receive a $10,000 stipend and the second candidate, Carrie Highfill, will receive $5,000 in a scholarship sponsored by Pioneer Hi-Bred. The remaining 17 students selected will receive $2,500 each.

“A skilled workforce is essential for the competitiveness of this industry,” Weaver says. “We need young leaders to look at pork not just as a food choice, but as a career. This is a chance for the industry to court these young people into a workforce that can offer many diverse opportunities. We have needs in production management, veterinary medicine, environmental management, food safety, genetic improvement and much more.”

Kansas State Swine Day Features Noted Economist

University of Missouri agricultural economist Ron Plain is the keynote speaker at Kansas State University’s Swine Day, Nov. 20 at the K-State Alumni Center in Manhattan.

An all-day Technology Trade Show starts at 8 a.m., and the formal program begins at 9:45 a.m.

Plain will speak on “Feed vs. Fuel – What Will Be the New Trends for Corn and Soybean Meal Pricing”? and “What Can We Expect for Pork Prices for 2009 and Beyond?”

K-State Research and Extension swine researchers and specialists will report current research to help improve the net return of swine businesses.

The day wraps up at 3:30 p.m. with an open house and tailgate party at the new swine finishing facility, built as part of the K-State Swine Teaching and Research Center. The swine farm is located at 3101 College Ave., just north of the poultry and dairy units on Marlatt Avenue.

More information and registration is available online. Click on “Research and Extension” and again on “Swine Day.”

Pork Profit Seminars Set for Missouri Sites

Three Pork Profit Seminars will be held in Missouri in early December, according to the Missouri Pork Association.

The Dec. 1 program is in Nevada at the Nevada Country Club. The Dec. 2 program is in Marshall at the MFA Research Farm. The Dec. 3 program is at the Lake Lenore Hall in Mexico, MO. All three programs run from 3-8 p.m.

Tony Martin of MFA Inc. speaks on emerging health issues and how to deal with them.

University of Missouri swine breeding specialist Tim Safranski will address sow productivity.

Richard Chapple, CBC Consulting, Waterloo, IL, will discuss optimizing pig diets in today’s economy.

Following dinner, Ron Plain, University of Missouri agricultural economist, will address marketing strategies to maximize returns.

In a second talk, Plain presents his market outlook.

NPPC Urges USDA Review Of Mexico’s Disease Status

Following meetings in late October with Mexican government officials, the National Pork Producers Council (NPPC) pressed the U.S. government to prioritize completion of risk assessments for classical swine fever (hog cholera) in a number of Mexican states.

Mexican officials in Washington have raised concerns about reciprocal market access by its producers into the U.S. pork market because some Mexican states have yet to be declared disease-free by the U.S. Department of Agriculture (USDA).

The Mexican government has said the states are free of classical swine fever (hog cholera), a highly contagious viral disease of pigs.

USDA’s Animal and Plant Health Inspection Service (APHIS) has cleared a number of Mexican states, and is conducting risk assessments on eight others with pork operations.

“NPPC supports a science-based decision regarding the importation of Mexican pork and pork products into the United States, and we have urged APHIS to make completion of its risk assessments for the remaining Mexican states a high priority,” says NPPC President Bryan Black, a pork producer from Canal Winchester, OH. “We also have urged APHIS to quickly begin the rulemaking process to allow Mexican pork imports once the risk assessments have been completed.”

Mexico shipped $34.5 million of pork products to the United States in 2007, while the United States exported nearly $450 million of pork to Mexico, making the southern neighbor the No. 3 destination for U.S. pork. For the first eight months of 2008, U.S. pork exports to Mexico were worth $417 million.

Iowa State Staff Appointed To Air Quality Task Force

Three members of the Iowa State University College of Agriculture and Life Sciences faculty have been appointed to a national air quality task force.

Hongwei Xin and Robert Burns, Agricultural and Biosystems Engineering professor and associate professor, respectively, and Jerry Hatfield, director of the National Soil Tilth Laboratory and a collaborating professor of agronomy, will serve on the Agricultural Air Quality Task Force. Agriculture Secretary Ed Schafer recently appointed 25 people to the new task force.

Task force members will review research that addresses air quality issues related to agriculture and provide advice on implementation of air quality policy and research needs.

The appointments are for two years.