Cover Story: Who should pay for trucking hogs to market?

Friday, August 8, 2008

That's the question facing Ontario Pork – and by extension producers – as it assesses the costs and benefits of moving to FOB plant pricing

by DON STONEMAN

In the face of so many marketing issues, transporting pigs to market may seem the least of considerations for producers. Yet it is emblematic of the changes and challenges that they will confront as the industry moves toward more choice in selling hogs.

Pork producers market hogs together and critical service suppliers, such as graders and truckers, are part of the settlement system that is now being questioned – and to some degree is under attack– as producers seek more choice in marketing.

The question of who pays for trucking, and how, has generated surprisingly little debate as Ontario Pork committeemen looked over a proposed new strategic direction at a meeting in London in June, according to 37-year-old Oxford producer Greg Haskett, a partner in a family-run, farrow-to-wean operation.

As the system works now, producers pay for trucking from their farm to a theoretical assembly point. From there, the packer pays the freight to the plant.

Policy papers issued by Ontario Pork said the board is assessing the costs and benefits associated with a shift to "FOB (freight on board) Plant Pricing" for market hogs. The process for evaluating the benefits and shortcomings of FOB Plant Pricing will be developed as part of the board's strategic direction.

A study conducted on behalf of Ontario Pork in 2006 by the George Morris Centre "determined that an economically efficient model of hog marketing would establish that the pricing point would be at the plant (FOB the plant)." According to the summary, authors concluded that "this system would minimize transportation costs, maximize producer revenue and efficiently allocate hogs among competing processing plants." Better Pork was not able to obtain a copy of the study, which is the property of Ontario Pork.

Al Mussell, a senior research associate at George Morris who conducted the study, says that hauling pigs, cattle and, for that matter, milk are very different because of regulations for each commodity.

Hauling cattle "used to be the weak sister to hogs for the revenue side, but that has changed," Mussell says. Now truckers find that there's less money in hauling pigs than in cattle.

Beef producers own their fat cattle until they are unloaded at the plant door. They may pay to truck cattle to the plant or auction market, or do it themselves.

Dairy Farmers of Ontario (DFO) assumes ownership of milk once it is loaded on a truck. The processor pays DFO and DFO pays the dairy farmer after deductions for fees associated with transportation, marketing and promotion.

By contrast, the pork board does not assume ownership of pigs in transit. However, at settlement, the packer pays the marketing board and the board pays the farmer. At the point of sale, the pork board deducts fees on behalf of truckers who "don't have to chase after credit issues the way they do with cattle," Mussell says.

At least one trucker has concerns about changing the current system. Tom Luckhart, vice-president of Luckhart Transport in Sebringville, doesn't "want to see Ontario Pork gone." He points out that the pork board collects trucking fees for him and pays him quickly.  Change that system and the trucker faces two costs that must ultimately be passed on to hog shippers, Luckhart says. First, the trucker will need a bigger line of credit to cover two or more weeks of operating without income as the transporter waits for payment. The second is the additional cost of hired help to send out invoices. Then there's the problem of chasing after money that is due, something that transporters don't have to do for the roughly 100,000 hogs or more which are shipped to packers every week.

While Mussell says that there's more money in moving cattle than in pigs, Luckhart says that beef producers typically don't pay for trucking for 15 to 30 days. The highly competitive motor freight business is another story still, he says. Typically, invoices may be unpaid for 60 to 90 days.

Mussell finds the truckers concerns about marketing pigs ironic, since truckers have not been happy with how they are paid for transporting pigs under the current system. It has been a sore point as market hog weights have increased, but truckers are paid per pig hauled.

Luckhart agrees that some parts of hog transportation need to be changed. Since market hog sizes have increased, and the Canadian Food Inspection Agency (CFIA) is getting concerned about stocking rates on trucks, Luckhart says that trucking should be based upon dressed weight of meat on the truck. That would be "fair to producers" and truckers would be appeased, as would the CFIA.

Betsy Sharples, who heads up the Ontario Trucking Association's livestock division, agrees that there will be increased administration costs if trucking costs aren't settled at the plant. But she thinks the concern that Ontario Pork will go that far in changing marketing may be premature. The strategic direction planning process is still at a preliminary stage. "I'm not going to panic yet," she says. "The board has the ability to self-regulate."

Producers to shoulder costs
Oxford producer Greg Haskett points out that trucking expenses from assembly points to plants are pooled among all Ontario producers. The FOB Plant Pricing proposal calls for producers to shoulder the costs of putting pigs from the farmyard into the plant.

For some producers, this may mean more costs, for others less. Haskett notes that it would likely cost less for an Oxford County producer to truck animals to a plant in Burlington than for an eastern Ontario producer to truck to the same plant.

Marketing board chairman Curtiss Littlejohn agrees that marketing and trucking pigs are intrinsically connected in Ontario's pork marketing system, but he doesn't think that the end to pooling trucking costs between the assembly points and packing plants will cause much grief. A Quebec packer, DuBreton, already sources pigs for organic and Humane Pork certification in western Ontario and trucks them to Quebec "because that's where the pigs are." Trucking costs will be just one more thing for producers to work out with their packer, Littlejohn says.

He believes that settlement of accounts is one reason why producers may, or may not, decide to market their hogs through Ontario Pork, once marketing choice is in place.   

"If you perceive that your bookkeeping at home is capable of receiving the payment, depositing it in the bank, entering it in the books, entering the invoices that you have to pay out of that, and then writing and mailing the cheque to the trucker – if you believe your system can do those things better than an automated electronic system, you will not perceive there to be value in that service."

Littlejohn thinks many producers will continue to sell hogs through Ontario Pork, rather than another agent for that very reason. Ontario Pork's system is efficient and well-maintained, he says. It markets five million hogs a year and performs several transactions for each pig.

Can Ontario Pork still do this cheaply if not as many pigs go through its system? "I don't know where the rate starts to change," Littlejohn says.

The pork board has decided that the system will open up in stages, but some things must change first, including legislation, Littlejohn says. "Before we go very far down the road (to open marketing), we want to assure that producers will get paid. In the United States, they have the Packers and Stockyards Act. We do not have an equivalent here in Canada."

In Saskatchewan, producers went broke because they kept extending credit to processors "and they never got paid," Littlejohn says. It's going to take time to get a livestock act in place, he says. He refused to be more specific about a possible timeline.

The concurrent hearing with the Farm Products Marketing Commission makes it tough for Ontario Pork to work out details of the strategic direction, Littlejohn says. The commission holds "the authority to send us in a different direction," Littlejohn says.

Back in Oxford County, Haskett says that the changes won't save the industry from its current woes. But setting policies "that are relevant for the circumstances today" and not allowing the Ontario Farm Products Marketing Commission to dictate future directions is "a good step for the health of the industry."

Haskett suggests that, in its preliminary stages at least, the pork board's strategic direction is "trying to as much as possible to be all things to all people, which is impossible to do.

"You're never going to be happy, but it's sort of gives the people who are progressive and want to be a key partner and build a relationship directly with a packer the freedom to do their thing, but yet still allows Ontario Pork to provide a service to people who feel they need it." BP

(With files from Mary Baxter.)