Integration Canadian producers need to follow the Danish model of harmonizing the supply chain
Many factors, most of them foreseeable and manageable, have triggered bankruptcies in the hog industry over the years. These factors include fuel costs, currency fluctuations and access to some markets closing.
Big Sky Farms, now in receivership, filed for bankruptcy protection and restructured its business just a few years ago after a similar run-up in feed costs. Manitoba-based Puratone Corporation is filing for bankruptcy protection.
The most recent bankruptcies are evidence the industry is still incapable of systemic adaptation.
Canada is one of the most cost-competitive pork producers in the world. Most swine producers in Canada are astute cost managers. Nonetheless, current business models in the industry don’t allow producers to hedge against higher feed costs. So when input costs increase, margins across key business units get much tighter.
Most of what we export is fresh or frozen, but value creation and economic growth lies in processing. Despite the relatively higher costs, Danish hog producers are efficient pork exporters. Denmark has harmonized the supply chain from breeding and genetics to production, slaughter, processing and export.
That gives the Danish hog industry an unparalleled competitive advantage. Such co-ordination from farm to market enables the industry to tailor products to specific market segments. So we buy pork from Denmark, but Denmark rarely buys from us.
After its last brush with bankruptcy, Big Sky, which is run by producers, remodelled itself to focus on managing supply, not on distribution or marketing that is sensitive to demand. Meanwhile, through close vertical and horizontal co-ordination, the Danish industry is able to decrease transaction costs, turn up efficiency and enhance the quality of its products. In other words, the industry’s structure is based on market demand, not on the primary producers’ needs.
Increased competitiveness must be based on enhanced economies of scale, and also on more strategic flexibility, proximity to market and increased global focus. The Canadian hog industry exported more than $3 billion worth of products last year. Some could be produced elsewhere. Production points could get close to aimed markets and logistical capacity could easily be enhanced.
The Canadian hog industry committed only to building cost-management efficacies in recent decades, making it vulnerable to unexpected changes in input costs.
Recently bankrupted companies will expect something from governments, and why not? Public coffers have helped the industry on several occasions in the past. Billions of dollars later, most governments have changed their views on how they want to support the hog industry, not necessarily by choice but by fiscal obligations. Governments are out of money. The Canadian hog industry will have to work itself through this difficult predicament.
Higher feed costs will likely trim herd sizes over the coming months. As usual, the industry will naturally recalibrate itself based on market conditions and prices will go up again. It is a shame that all this will happen without a long-term strategy in place.
To save the hog industry, governments should leave it alone and let it figure out how to better manage systemic risks. Or else, it will continue its journey toward a slow and certain demise.