Cover Story: Quebec Pork Producers

Sunday, April 5, 2009

Burdened with debt and an unsustainable safety net Quebec farmers have the highest debt load in Canada and their provincial support program is facing a $780-million deficit. Reforms are on the way, but a number of producers will likely go under

by SUZANNE DEUTSCH

Quebec's farm support programs may be generous by Canadian standards but, despite a record $550 million payout in 2008, the hog sector in la Belle Province is still suffering. Payouts for this sector were significantly higher than those made to all other non-supply-management and crop commodity sectors combined.

Small wonder! Hog producers will tell you that Quebec is among the costliest places to raise hogs in Canada yet, according to Agriculture and Agri-Food Canada's (AAFC) statistics, they routinely receive a lower price for their hogs than their counterparts in Ontario. So when you toss in a high Canadian dollar, exorbitant feed costs and rising energy bills, it's not surprising that the sector is reeling.

"Tell Ontario producers it isn't the Klondike over here," says Noélline Ménard who, along with her husband Louis Roy and their son Pascal, own a 180-sow farrow-to-finish operation near Drummondville. "Those that think otherwise can come and take a look at my books."

Ménard explains that many of her colleagues have refinanced their operations and the ones that couldn't get credit have either closed up shop or are on the brink of doing so.

Ménard and Roy have been in the hog business since 1999, after selling their dairy quota. Their dairy operation had been struggling because their cattle had been stressed and ill from stray voltage ever since Hydro Québec installed high voltage lines nearby.

So, with lots of encouragement from the provincial agriculture ministry, they decided to start anew with hogs and built new barns further away from the lines. As the saying goes, it seemed like a good idea at the time.

Fast forward 10 years and their debt level is higher than when they started. By their estimate, they should have 50 per cent equity in the buildings, but instead the barns need repairs they can't afford. Quebec's farm income stabilization insurance program payments are keeping them afloat, but money is tight.

Quebec hog producers, like hog producers across Canada, receive support from the national AgriStability program. Payouts are based on a producer's historical income, or margin, and decline if a farm has had several bad years in a row. Unlike producers elsewhere they are also eligible for Quebec's unique farm insurance program, ASRA or Assurance Stabilisation du Revenu Agricole. This program works by using industry benchmark prices which are based on a cost of production formula. (See "How ASRA is calculated," page 12.) If market prices dip below these industry benchmarks, an ASRA payout will make up the difference. Since ASRA compensates producers for any market shortfalls, it gives them predictable revenues and has earned a reputation for offering a real safety net.

The problem is that ASRA, created in 1976, is no longer sustainable. The Commission on the Future of Quebec Agriculture and Agri-food (CRAAQ), tabled in early 2008, underscored the need to reinvent the program and gave Michel St-Pierre, the former provincial deputy minister of agriculture, the daunting task of coming up with a solution.

In an interview with farm journalist Nicolas Mesly of Le Coopérateur Agricole, he explained how the program derailed and why it is now facing a deficit of nearly $780 million1. "We (Quebec) inject twice the amount of money other provinces do, and substantially more than the Americans."

Over time, ASRA became such a great risk management tool that bankers and lenders were much more willing to extend credit based on potential program payments rather than the farm's actual productivity. According to St-Pierre, 90 per cent of agricultural revenues are covered by either supply management or ASRA. He fears that this has cut producers off from market signals and has created a security bubble in the province that doesn't exist anywhere else in North America.

This bubble has allowed Quebec farmers to carry the highest debt load in Canada. This means that each new generation starts their farming career by saddling themselves with a heavy debt so that their parents can retire.

Holes in the safety net
ASRA, which covers 16 non-supply management and crop commodity sectors, was originally intended to help farmers boost productivity. It started going awry when various governments in power started to use ASRA for other purposes – as a means to fund start-ups in the cattle and sheep sectors and to promote agriculture in remote areas.

The ASRA safety net also has more than a few holes. For example, it is of no help if – for some reason, such as disease or plain bad luck – a farm's production efficiency drops below provincial standards. Ménard and Roy had a really bad Circovirus outbreak in 2006 and had a mortality rate close to 45 per cent. "The outbreak in the finishing facility was devastating because by that time we had invested so much more in each hog," says Ménard.  Only hogs that are sold are covered under ASRA, so the fewer number of hogs you have to sell, the smaller your stabilization payment will be.

Pierre Désourdy, a 500-sow farrow-to-finish producer near St-Valérien, invested almost $2 million in his barns in 2000 and added another 900 acres to the original 200-acre land base he bought in 1974. He was astonished last year when federal agriculture minister Gerry Ritz told him that ASRA gave Quebec hog producers an advantage over the rest of the country.

He's tired of being asset-heavy and cash-poor and he is downsizing at age 63. He has even toyed with the idea of selling to a group of Chinese investors who are hoping to buy hog operations in Quebec and export production to China. While he considers the proposal to be the ultimate compliment for his quality product, Désourdy says that his dream was to see his kids, not foreigners, take over the $7-million operation.

Since only two of his four sons will be taking over, Désourdy says he will be selling some land so that he and his wife can, at least theoretically, retire. The sale will also help all of them deal with cash flow issues.

Noélline Ménard is equally disillusioned. Like many of her generation, she has struggled so much with debt that she has mixed feelings about inflicting the same trials on her son and she wonders if she is giving him "a poisoned gift."

"We'd be better off without ASRA; half would go under and abattoirs would have no other choice than pay decent prices for hogs," says Jean-Paul, a 600-sow farrow-to-finish producer who wishes to remain anonymous. "If the intent with ASRA is to help preserve the small family farm, it has failed miserably. The big payouts go to just a handful of vertically integrated operations who are benefiting from low hog prices. For independents, it's just keeping them from going under."

His opinion is shared by Sylvain Charlebois, an associate professor at the faculty of business administration at the University of Regina. Charlebois is a proponent of free-market agriculture. "ASRA is supporting a sustained level of supply which is hurting everybody, including hog farmers outside Quebec," he says. "It is distorting the capacity for the industry to compete over the long term."

Insurance, not giveaway
No one is quite sure what St-Pierre will ultimately recommend, but rumours abound that the new program will be capped at $150,000 per year per farm.

"The one thing we all agree on, whether it's the Pronovost Commission or the minister of agriculture, is that agriculture needs some type of government support," says Jean-Guy Vincent, president of the Quebec Federation of Pork Producers (QFFP). "Farmers need protection when prices drop. We need programs in agriculture that ensure that farms can survive."

Vincent adds that ASRA is not a free giveaway, it is an insurance program. The more it is used, the higher the premiums will be. "We have given ourselves a safety net but, once the crisis is over, we will need to replenish the program and producers will have to pay an extra $15 per hog premium for two or three years to restore the fund," says Vincent. "There is no such thing as free money."

As a result, it will take longer for hog producers in Quebec to get back on their feet once the crisis is over. "Difficult decisions will need to be made," adds Charlebois. "What's happened in 2008 is a clear call for change. We have an over-capacity of production right now, and too many hog producers. Both levels of government need to revisit their objectives and decide what kind of hog industry we want for Quebec, and for Canada."

Vincent remains optimistic about the future of the industry, but 2009 will probably spell the end of operations for a number of producers. News that the U.S. Country-of-Origin-Labelling is being altered, along with the continuing decline in U.S. and European hog inventories, is welcome for the hog industry in Canada. It may well be the break that Quebec producers have been looking for.

Last June, the federation of pork producers reached a tentative agreement with pork processors to give Quebec producers price parity with their U.S. counterparts. Hogs produced in the province would continue to be slaughtered in Quebec. The current electronic auction system will be eliminated and abattoirs will be required to enter into supply chain contracts with producers. This will give producers a guaranteed outlet for their hogs and solve the headaches many have experienced in the past.

Under this agreement, abattoirs will also have to process Quebec contract hogs before buying hogs from out of province. Vincent is confident that this clause won't have a significant impact on Ontarians. "Our slaughtering capacity will increase in the next few months, so there is no reason why this should adversely affect Ontario hog producers."

Menard and Roy both view the agreement as a quota system. Anyone wanting to get into hog production will have to buy the right to produce hogs from current producers. For his part, Vincent thinks it will give the industry the edge needed to increase the quality of its products and obtain better pricing on foreign markets.

Meanwhile the five-page agreement has grown into a 60-page manuscript, and it is taking more time than anticipated to get all the processors on board. "Olymel S.E.C/L.P (the largest processor with capacity for approximately 160,000 pigs weekly) signed last Dec. 6, we are confident the others will sign shortly and that producers will get the U.S. (pricing) reference before the end of 2009," says Vincent. BP

1-Source: Financial statements of La Financière Agricole, du Québec Mar. 31, 2008.