Cover Story: Right-sizing, supply management, the Quebec model?
Thursday, October 1, 2009
A pummelled pork industry looks at the hard choices
With prices and exports sharply lower, and the misnamed flu virus adding to the pain, individual producers and industry organizations are struggling to develop a workable survival strategy
by MARY BAXTER
Mike Kolisnyk and Wayne Bartels are two Haldimand County hog producers who are doing what they can to remain afloat during an economic hurricane. But while their two operations may share some marked similarities, like their peers across the province they couldn't be more divided on which direction to paddle next.
Kolisnyk, 51, grew cash crops before launching his hog operation in 2006. He finishes and sells 2,000 hogs a year under contract to Maple Leaf Foods Inc., whose Burlington plant is a 45-minute drive away from his Dunnville farm.
With his proximity to the plant, a contract that keeps getting renewed and acres of equity, you'd think this farmer would be in the black. But, as of mid-August, Kolisnyk was receiving $105 per finished pig that cost him$160-170.
"We need about $170-175 to break even," he says, noting that without a loan from last year's federal advance payments program, his hog operation's doors would be closed.
So, too, would Bartels' if it wasn't for a $400,000 loan through the same program.
The 625-sow operation that Wayne, 36, operates with his brother Geoff, 29, near Cayuga combines weaner and market hog production. Like Kolisnyk, they have a Maple Leaf contract.
Bartels, a former dairy farmer, began hog production in 2003. In 2007, he garnered a $20,000 award from the Ontario Pork Industry Council for herd management.
Both Kolisnyk and Bartels, along with nearly 100 Beginning Farmers, sought but failed to qualify for an emergency direct payment under the province's 2007 $130 million cattle, hog and horticulture program.
Now, they're eying the federal government's most recent aid package with skepticism, although both plan to apply. It consists of government-backed long-term loans at market rates, a buyout program worth $75 million and $17 million towards marketing pork.
Preliminary information suggests efficiency and sound practices will be a prerequisite for loans. "I can't be any leaner than I am already," says Kolisnyk.
Bartels, a spokesperson for the fledgling but growing farmers group, notes that the government ignored a report from the Canadian Pork Council calling for a $30 per market hog payment to producers for animals shipped in the first quarter of 2009. He also thinks the province should chip in, or "we'll be eating Quebec and U.S. pork."
As of the end of August, no additional funds from the province had been announced. In an Aug. 27 e-mail, responding to questions about the possibility of funding coming from the province, agriculture minister Leona Dombrowsky states that the province has worked with the federal government to deliver federal aid. Provincial and federal ministers also agreed "to conduct a strategic review of business risk management programs to ensure that these programs are working for all producers," she adds.
Labelling bottleneck
Bartels says he's not normally a supporter of "government handouts," but considers them necessary in a disaster. And those in the industry agree that the economic storm that has pummeled Canada's pork producers in recent months has the potential to eliminate a whole industry across most of Canada.
It started last year with producers experiencing escalating input costs and a sudden, sharp rise in the Canadian dollar just before world markets collapsed and the global recession took hold. The dollar's value may have subsequently dropped, but input costs remained high.
Meanwhile, prices for hogs plummeted because of oversupply due in part to a rise in slaughter weights and the effectiveness of new porcine circovirus vaccines. The biggest factor, however, says Ken McEwan, a University of Guelph professor specializing in agricultural economics, is a softening of global demand.
New country-of-origin labelling legislation in the United States is the main culprit. As of Aug. 8, Canada shipped 3,857,373 live hogs south of the border compared to 5,828,261 for the same time period last year, a drop of 33.8 per cent.
The bottleneck created by the U.S. labelling legislation prompted Canadian producers to search for buyers within the domestic market. This created a "domino effect" among the provinces, says a spokesperson with Federation des producteurs de porcs du Québec who attributes an influx of weaner pigs from Ontario into Quebec in recent months to weaner pigs from Manitoba entering Ontario's market. In turn, a surplus in the Quebec market last fall led to 35,575 market hogs being sent to Ontario for slaughter in 2008, although the amount was significantly less than the 275,473 market hogs Ontario producers sent to Quebec for slaughter.
A tough situation became grim this spring when a seasonal price rally failed to materialize because of an outbreak of a new flu virus – H1N1, identified in the media as "swine flu." Estimates from Ontario Pork place the damage of the misnomer to provincial producers at $9 million. Price was affected more than demand. Hog statistics published by Agriculture and Agri-Food Canada for the week ending Aug. 15 show hog prices in Ontario plunged to $105.60 per 100 kilograms from $155.76 for the same week in 2008, a drop of more than 32 per cent.
McEwan says that, because of the relative sizes and integration of the Canadian and U.S. marketplaces, prices won't go up in Canada until U.S. prices start to rise. "And the fact that the U.S. herd has been very resilient has made it (a price rebound) very difficult."
He attributes this resilience to a business model that stresses a high degree of integration – either by forging production alliances or becoming involved in different aspects of the production and processing chain. Size helps: The 20 largest U.S. operations represent 3.1 million sows, equivalent to more than 50 per cent of the U.S. breeding herd inventory.
In contrast, the largest farm in Ontario "might have 15,000 sows" and Canada's breeding herd has contracted by 12 per cent over the past two years, largely due to the federal cull breeding swine program.
Less pork, more value
McEwan says the dominance of the U.S. market and its players mean Canadian producers' challenges remain the same: Canadian producers will have to focus on how to survive and operate within the North American business environment. He speaks positively about Canadian producers' ability to compete globally – "Canada has had a tremendous success story" – and notes the country represents 17 per cent of world pork trade exports.
But Kolisnyk questions whether the future might lie instead in the domestic market and supply management. "If there is less pork out there, the value is going to go up," he says.
Over the summer, Perth County hog producer JoAnne Caughill has asked the same question, first at local meetings and later as the head of a 12-member grass roots steering committee which is examining future directions. "I guess the stand for moving supply management or a similar system forward is that the current situation isn't working and they (supply management supporters) are in favour of an orderly move to the right-sizing (of the industry) as opposed to the last man standing," she explains. She notes that local Conservative MPs such as Wellington-Halton Hills MP Michael Chong and Bruce-Grey-Owen Sound MP Larry Miller have encouraged producers to look at supply management.
"I haven't encouraged anybody," says Miller."What I have said to them is that the only way that government could consider supply management is that it has to be the industry as a whole," he says. "You can't fragment it."
Chong did not respond to a request for an interview.
Miller's response echoes an Aug. 25 email from the office of federal Agriculture Minister Gerry Ritz: "If pork producers want to close the doors to these international markets, they need to build consensus within the industry," Ritz states. Consensus is also key for Dombrowsky, who says she would like to see a plan endorsed by all producers.
Wayne Easter, the federal Liberal agriculture critic, believes that it would be difficult to bring supply management into place because of trade agreements, but if the industry wanted to go that way, "we (Liberals) would be supportive of trying to get them there."
It's not the first time the industry has considered supply management. In 1982, the Ontario Pork Producers' Marketing Board evaluated free market and supply management models. It noted that supply management would take a long time to establish, require buy-in from hog producer groups across the country and constrain or even eliminate export opportunities. It suggested success would be contingent on beef producers following the same path.
In August, responding to a motion by the Wellington County Pork Producers Association, Ontario Pork's board directed McEwan to produce a report on supply management, to be completed in the fall.
JoAnne Caughill says information the grass roots committee has obtained shows that the industry must shrink 65 per cent to embrace supply management – and bring exporters and packers onside. Right now, that doesn't look feasible, but "we don't know what our industry is going to look like in the next year with the current crisis we're in." The committee recognizes supply management could take a long time to establish and are exploring other orderly marketing schemes for the interim.
Quebec model
Adopting an arrangement similar to Quebec pork producers' new collective marketing agreement intrigues the committee. Under the agreement, which began in September, producers are assigned to packers and packers must deal with surpluses. Contracting is still allowed for niche markets, but packers must work with their assigned partners. The Fédération continues to do all invoicing and payment to producers. Payment is based on U.S. prices.
Caughill says she's heard concerns from Ontario producers that the arrangement gives Quebec producers an unfair edge in the domestic marketplace, especially since they are backed by Quebec's farm stabilization insurance program, L'Assurance-stabilization des revenus agricoles, which provides compensation when a product's average selling price is lower than the stabilized income.
There is also the fear that Quebec-based Metro Inc., which owns Ontario grocery chains such as A&P and Food Basics, plans to rely exclusively on pork products from its Quebec plant.
"That's absolutely not true," says Leslie Powers, a spokesperson for Metro Ontario Inc. She says the company's Quebec plant processes smoked ham and fresh pork is acquired from processors with the most competitive price.
For his part, McEwan says that the movement of U.S. pork into Canada, sparked by the change in the exchange rate, is a more important issue than interprovincial competition. It "has expanded significantly in the last four or five years."
So far, the grassroots committee hasn't reached any conclusions, says Caughill. Once the group reaches consensus, it plans to take the vision to Ontario Pork for further development. "We know that, going forward to Ontario Pork, there needs to be some kind of voice for all producers," she says, but adds that it's hard to achieve "that single voice."
Should the industry change its focus from exports to supply management because of the current crunch? "I don't think so," says Bartels. "When we were in the quota business where it didn't matter how hard we tried and it didn't matter how good we were at what we did, we could not succeed," he says of his former dairy operation.
Moreover, with their proximity to "the bread basket of North America," Canadian producers have the competitive advantage in export markets of being one of the cheapest places in the world to grow pork. Pork production adds value to grains and it creates jobs, he adds.
McEwan lists many of the same reservations about supply management as presented in the 1982 report. Nevertheless, he thinks it is worthwhile to examine different systems.
Quebec's system holds both appeal and drawbacks. Processors will have a greater say in whether a producer can expand and the controls on supply effectively eliminate live animal export opportunities because of the risk of triggering international trade action.
"You can't just go off and build wherever because shackle space may be tight and you can't be shipping pigs to the United States." It's also built on a processing capacity significantly larger than Ontario's, and won't accommodate live animal exports, he adds.
At the same time, he notes that the business model of shipping hogs to the United States is no longer sustainable and likely to change, although U.S. processors will continue to buy Canadian pigs as needed.
Trade volume with Canada's top pork trading partners may have remained fairly steady, but replacing live animal exports with pork isn't realistic at current prices, he says.
However, "the pigs are here and it would make some sense to balance out our production and slaughter capacity so that we reduce our dependence on the U.S. market, especially for the live pig movement."
In the meantime, survival for Ontario producers may not be about being big, but rather about doing things well and persevering. "And that," says McEwan, "means high productivity, great cost control, looking for any opportunity to lower their cost structure, paying down debt – anything to prolong capital expansion so they can survive." BP