It’s an everyday act — but one that shows why hog producers in this province are getting near the end of their rope.
An Alberta producer recently delivered 200 pigs to a packing plant and got paid $4,000 less than it cost to raise those animals. And then he had to disinfect his truck at a cost of $500.
“So he walks home minus $4,500,” said Darcy Fitzgerald, executive director of Alberta Pork. “How does he do that consistently?”
But if that same load of pigs had been delivered to one Manitoba hog buyer, the farmer would have at least broken even on the animals (although he would have been down the $500 cleaning bill).
And if the pigs were sold in Quebec, the farmer would have had a profit of $5,500.
The pork business is very profitable right now but the system used to price most hogs in Western Canada means producers here are suffering “devastating” losses, say industry officials.
“When your industry is shrinking but yet the product you produce is growing in demand, there’s a problem,” said Fitzgerald. “Supply and demand says if there’s a high demand, the supply price should go up, and that hasn’t happened.
“This is a serious problem that needs to be addressed.”
Last month, Alberta Pork and its sister organizations in B.C., Saskatchewan and Alberta sent a letter to Canada’s biggest pork packers (Maple Leaf Foods, Olymel and Donald’s Fine Foods) saying their broken pricing system needs to be replaced or there’ll be an exodus of producers.
“We’ve said we want to meet and talk about how we can fix this system so that it works for both the packers and the producers,” said Fitzgerald. “The packer wants to make a profit, and that’s good, but so does the producer. The packer wants to have a return of 10 to 15 per cent? Well, the producer would like that, too.”
Currently, prices are determined by a U.S. model that is so thinly traded “they can’t even post the number because it may identify the individual selling the pigs or the plant buying the pigs,” he said, adding there are times when there are simply no pigs on that marketplace, forcing producers to rely on the last available price.
“It’s so bad that the Chicago Mercantile Exchange (CME) that we all use has said for the last number of years that we need a better system,” said Fitzgerald. “This is not going to last. It’s going to collapse.”
And because of COVID, the futures market has also “gone out of whack,” he added.
“We’re seeing prices that we’ve never seen before,” said Fitzgerald. “Right now, producers are losing money. They’re probably making $1.35 a kilogram, and the five-year average is more like $1.85 a kilogram. We’re 50 cents out, and that’s significant.”
Increasingly, American pigs are priced based on a cut-out model that looks at the value of the pork. Depending on the market, that puts a premium of $20 to $50 a head on the value of the live pig.
That’s the model they shifted to in Quebec last year, said Fitzgerald, meaning producers there get at least 90 per cent of the cut-out value (using USDA figures).
That’s closer to the model that western Canadian pork producers would like to see.
“We’d like to use a system based on the cut-out value, where the producer is at least guaranteed he’ll get a certain percentage of that value. Then at least he has something he can bank on,” said Fitzgerald.
“This way, if the packer is making money, the producer is making money. If the packer’s not making money, neither will the producer.
They’re working together instead of being in opposition.”
‘It’s got worse and worse’
While the packers have not yet responded to the request from the farm groups for a meeting, their ask isn’t unprecedented. Aside from the shift to cut-out pricing in Quebec, HyLife — a packer based in Manitoba — has begun moving toward this model.
“They recognize that needs to happen for those farmers to stay in business,” said Fitzgerald. “Times have changed. The packer has to look at this and see that he would not be in business if he had a negative return on his investment, so how could he expect the producer to do that?
“Everybody needs to make out OK. That’s really the bottom line.” Packers are making a profit — almost $300 million above last year for the first quarter of the year — while producers can’t even meet their cost of production, he said. “In this system over the past number of years, it’s got worse and worse for the producer,” he said. “He’s now seeing on average more days that he’s losing money than he actually makes money. And in some years, it’s significant. There won’t be very many months where he actually makes any money.”
In mid-June, the base price at the Western Hog Exchange was $1.571 per kilogram dressed, while HyLife’s price was $1.7312 per kilogram dressed. The price in Quebec was even higher, at $1.976.
“If you look at the Western Hog Exchange price versus the HyLife price, with premiums you’re looking at almost $20 a head difference. If you look at Quebec, we’re looking at probably $50 a head difference,” said Brent Moen, vice-chair of Western Hog Exchange and chair of Alberta Pork.
“If you consider that break-even is about $1.65 per kilogram, western Canadian producers who are not priced on the cut-out are losing money.”
It’s even more significant when you look at the seasonal cycles of the pork business, Moen added.
Hog producers tend to lose money from October to April, at which point they start to move out of the red and into the black. In summer, they typically make $40 to $50 per pig, which brings their average annual return to between $10 and $15.
But this summer, it’s expected producers will lose an average of $30 a pig.
“Unfortunately because of COVID, we’re in a situation today where this week’s price for Western Hog Exchange is going to be $1.35. Next week’s price is probably going to break below $1.20,” Moen said in mid-June.
“If you look at it compared to cost of production, we’re going to have a$35 to $40 loss per head—but if you look at it relative to normal seasonality, we’re at about $80 a head out of cash flow that we would normally have. It’s devastating. It’s absolutely huge.”
And Western Canada’s pork industry will only continue to shrink if the pricing model isn’t fixed.
“It’s at a point where it really could potentially devastate the industry,” said Moen. “Realistically, if producers were thinking about getting out of the business or shutting their barns down for major renovations, they should probably be doing it now. These losses are devastating.”
The effect could be permanent, Fitzgerald added.
“Now we have an industry that’s not growing anymore — it’s shrinking,” he said. “When there are no new barns being built and people are leaving the industry, that’s a bad sign. That’s a sign that there’s a problem here and we need to fix it.”
And that starts with changing the relationship between processors and producers.
“Historically, packers and producers have had an adversarial relationship,” said Moen. “That really has to change. We’re hopeful that the packers will sit down with us, but if we can’t, that will send a pretty clear message to producers that we need to change the business model we have.”
That could mean some producers will move toward owning their own packing plants, as they have in the States, he predicted. But others may just quit the business.
“In both cases, the net benefit to the existing packing plants is a negative,” said Moen. “Ultimately, they’ll lose producers and their pigs.”