As we entered the new year, industry commentators in North America unanimously declared optimism for American and Canadian hog producers in 2014. For once, I agree with them. Regular readers will know that I have been less than enthusiastic about prospects for the Canadian industry in recent years. Last March, I described the outlook as uncertain, noting a number of factors such as feed prices, country-of-origin labelling, EU production levels, U.S. pork exports and North American hog inventories, that could impact industry economics either positively or negatively. However, as it turned out, 2013 was a much better year than many people, including myself, expected.
Last spring the hog price strengthened and continued moving up as the summer progressed, reaching $2/kg in some parts of the country by July. As we moved into fall, the price held up remarkably well and is now around $1.50/kg, considerably better than the recent average for this time of year. With most pricing formulae based on U.S. indices, the exchange rate plays a major role in determining Canadian hog prices. The increase in the value of the Canadian dollar relative to the greenback, especially since the 2008 economic crisis, exerted downward pressure on the hog price, which was very damaging to the industry. In 2013, this started to change. At the beginning of the year, the exchange rate was 100.51 cents, but declined during the year and is now hovering around 94 cents. That difference effectively adds nearly seven per cent to the market price of hogs in Canada. A number of economists in the financial sector expect the Canadian dollar to weaken further during 2014 as the U.S. reduces its economic stimulus. If their predictions are correct, the exchange rate will fall below 90 cents during the year, further strengthening hog prices.
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Feed cost break
On the other side of the equation, feed costs fell considerably during 2013. During the early part of the year, high feed costs, coupled with mediocre hog prices, resulted in a period of significant losses. These were mediated by much improved prices as the year went on. Then, a bumper harvest in both the U.S. and Canada resulted in a sharp drop in feed costs, with U.S. corn dropping from a high of $8 per bushel in 2012, to around $4.50. The beneficial effect of more moderate feed costs will continue at least up to the 2014 harvest. With the futures markets indicating hog prices in the range of $1.60-$1.90 for 2014, producers could have a full year of profitability.
Over the last 10 years, the U.S. ethanol industry has impacted the price of corn, pushing prices upwards. By 2012, 40 per cent of the U.S. crop was being used for ethanol production. Now this industry is mature and there is much less expansion, this will affect corn prices less. A significant increase in the area planted with corn in the U.S. over recent years will also help to moderate prices, barring a drought.
I have commented in previous articles about the continuing improvements in productivity in the U.S. breeding herd, noting that the average improvement in the 10 years to 2012 was 0.2 pigs weaned per litter. During 2013, this trend was interrupted by severe losses of piglets as a result of porcine epidemic diarrhea virus (PEDv). The first cases were identified in June and July and, by the end of the year, there had been about 1,800 cases involving many hundreds of thousands of pigs. American agricultural economist Steve Meyer suggests that the loss in production during 2014 could be about three per cent, which would have a very positive effect on hog prices. The impact was already evident in the recent USDA Hogs and Pigs Report, which showed that the estimate of number of pigs weaned per litter had fallen from 10.34 in the Sept. 1 report to 10.04 in the Dec. 1 report.
The biggest threat to the Canadian industry during 2014 will be PEDv, which would have a catastrophic effect if it entered the country. Fortunately, there is considerable awareness of the need for heightened bio-security, but there is also a risk due to the movement of livestock vehicles. It is ironic that the U.S. COOL legislation dramatically reduced the flow of pigs from Canada to the U.S. and, with it, the risk of transferring disease. Weekly feeder pigs sales have halved from a peak of 160,000 per week in 2007, while the flow of market hogs has become a trickle at roughly 13,500 per week. It will be critical that producers and industry organizations maintain a state of vigilance and, if the worst happens, respond quickly to any outbreaks to limit the spread of disease.
Canadian pig producers are some of the most technically efficient in the world and economic comparisons have shown that cost of production is also among the lowest, second only to Brazil. However, since the start of the “industry crisis” in 2007, producers have been severely hampered by a barrage of negative influences, ranging from the swine flu fiasco to COOL and from exchange rates to high feed prices. While the COOL situation has yet to be concluded, the Canadian industry has, to some extent, learned to live with it. With a slowly weakening dollar and the prospect of more reasonable feed prices, producers could be in for a good run and have the opportunity to recover the equity they have lost over the previous six years.