Meat and milk producers in developed countries with export businesses are caught in a classic economic situation where product prices have been driven by slowly changing consumer prices while input costs for raw products like feed and energy were caught in a price bubble. With an economic recession and health scares shrinking consumer markets, producers must adjust. When government policies prevent adjustments in a country, more adjustments must occur in other countries.
The U.S., Canadian and Mexican pork markets are integrated under NAFTA. In biennial reports on NAFTA prepared by the Economic Research Service of USDA, the pork market has been identified as one of the most integrated agricultural markets. Feeder pigs and live hogs move from Canada to the U.S., pork products move both ways across the border and Canadian and U.S. pork is shipped to Mexico.
Canadian hog producers claim they are facing a “perfect storm” of factors hurting profitability. An outbreak of circo-virus disease caused death losses in 2005/06, the Canadian dollar increased sharply in value versus the U.S. dollar, U.S. and Canadian corn prices increased rapidly beginning in late 2006, U.S. implemented a country-of-origin labeling (COOL) program in 2008, exports were hurt by the worldwide recession beginning in the fall of 2008 and the H1N1 flu reduced demand for pork in domestic and export markets in 2009 and may continue for the foreseeable future. The Canadian government responded in 2008 with emergency advance payments with repayment deferred to September of 2010 and a breeding animal reduction program to reduce the herd by 8 peresenti.
Economic factors that impact hog production in Canada usually also impact the U.S. The ones not impacting U.S. producers are the value of the Canadian dollar, COOL and the degree of dependence on export markets. COOL is the only NAFTA market issue that could be impacting Canadian market conditions.
The “right-sized” industry Canadian producers envision for 2014 would have:
Domestic use of Canadian pork at 730,000 matani a metric (MT) up 150,000 MT from 2008 with an 88 percent market share, kuchokera 75 percent in 2008; Exports of 4 million live hogs to the US, pansi kuchokera 9.3 million in 2008; Pork exports of 1 million MT of which only 20% would be to the US; Domestic slaughter of 21.5 million head, pansi 0.2 million from 2008; and Pig production of 25.5 miliyoni, pansi kuchokera 31.0 million in 2008.
Hog producers are seeking a C$800 million liquidity program. Starting in the first quarter of 2009 producers would receive a loan of C$30 per hog marketed. Beginning in the third quarter of 2009 the loans would be based on the average provincial hog price minus average provincial cost of production. Loan draws would continue until provincial hog prices return to pre H1N1 levels. Loans would be available to all producers regardless of the number of hogs produced and repaid in 10-15 zaka. The previous emergency advances due for repayment in 2010 would become part of the 10-15 year repayment program. Hog producers would be paid $500 per sow to exit the industry with facilities left unused for at least 3-5 zaka. The industry would also improve market competitiveness and develop new markets.
Despite lower hog inventories, hog slaughter in Canada in 2009 is above the year earlier as fewer market weight hogs move to the U.S. Ample supplies of hogs in the U.S. are limiting demand for Canadian hogs and pork. Live hog exports to the U.S. for breeding, feeding and slaughter increased from 4 million head in 1999 kuti 10 million head in 2007 and some pull back is not surprising.
U.S. hog industry has its own problems caused by some of the same factors impacting Canadian producers. According to the National Pork Producers Council, U.S. producers have lost an average of $21 per head since October of 2007. University of Missouri economists Ron Plain and Glenn Grimes believe the U.S. sow herd needs to be reduced an additional 7-10 percent to balance supply with demand. The Council believes the Canadian plan would reduce U.S. producer market prices by 7 peresenti.
From a trade policy perspective, the Canadian support plan gets a mixed review. The sow buyout program would be the least disruptive, except for U.S. finishers of Canadian pigs who would pay higher prices for pigs and U.S. processors who will have smaller hog supplies. The larger issue is the loans to keep producers in business. The loans already made have kept supplies larger than without the loans. If demand does pick up and supplies become less burdensome, repayment will still weigh on the profitability of producers which could result in additional aid programs.
Demand restructuring by 2014 may also be overly optimistic. The value of the Canadian dollar is expected to remain strong against most currencies. U.S. provides 95 percent of the pork imports to Canada and a significant reduction is not likely. Exports to the U.S. currently account for 30 percent of Canadian exports, pansi kuchokera 40 percent in 2006 ndi 2007, and decreasing them to 20 percent while increasing exports to the rest of the world during weak markets will not be easy. They will face growing supplies from Brazil and others who have cost advantages.
While Canadian hog producers may have suffered more losses than other producers in the world because of some unique conditions, they are not alone in the need to make further production adjustments. COOL within the NAFTA market is likely a part of the problem, but relief there would not make the other issues go away. Government assistance programs in a country should not simply shift the adjustment burden to another country. That would prolong the adjustment process and make it more difficult for all pork producers.