Second Look: Downsizing the Ontario pork industry: how small is too small?

Thursday, June 10, 2010

If production continues to decrease, then at what point does Ontario production become too low to support the viability of the current Ontario processing sector capacity?

by RANDY DUFFY

The Ontario pork industry has undergone a significant reduction in production. The breeding herd has shrunk by 109,000 sows in six years. This is a decline of 25 per cent since the peak of 433,300 sows in April 2004.

Estimated total weekly production has gone from 140,000-145,000 head in 2004 to 110,000-115,000 head currently in 2010 (see Figure 1). Total federal and provincial weekly hog processing capacity in Ontario in April 2009 was estimated at about 105,250 head. The three largest Ontario processors in terms of capacity are Maple Leaf (43,500 head), Quality Meat Packers (30,000 head) and Conestoga (13,750 head), which combined account for 83 per cent of Ontario's total capacity.

Year-to-date hog slaughter in Ontario is averaging 90,000 with recent weeks running 85,000-90,000. This means that Ontario currently is producing 20,000 pigs more than it is processing with 75 per cent of these pigs being exported to the United States as feeder pigs.

Pig supplies have gotten tighter relative to capacity in Ontario. This has resulted in the recent strength in the market hog Pool Price compared to the Standard Contract and Pool Plus prices.

However, Ontario is not quite balanced yet in terms of production matching processing. Is it ideal for the Ontario industry to have production balanced with slaughter capacity and aligned with further processing capacity?

If Ontario continues to over-produce relative to slaughter, this provides a buffer in periods when productivity challenges are encountered and production drops. This also allows for some market hogs to continue to be exported to the United States to determine their value relative to those hogs sold in Ontario. If production was more balanced with processing, then any small drop in production could potentially cause the Pool Price (i.e. the spot market) to increase.

This, in turn, could ultimately lead to higher Standard Contract prices and longer contract lengths, since Ontario processors would have to bid more aggressively to ensure their hog supplies.

It is critical that Ontario have a stable processing sector over the long term. Recent history has shown that the Quebec and U.S. export markets should not be counted on as dependable long-term destinations for large volumes of Ontario pigs. It is uncertain how Quebec's recent marketing changes will affect imports of non-Quebec born pigs.

Priority will be given to Quebec born pigs. This may mean that Ontario pigs will only be imported in times of lower pig supplies or for niche contracts. The U.S. market has a Country Of Origin Labelling legislated trade barrier that makes exporting risky. Canadian pigs are still being exported to the United States because of tighter pig supplies in that country. However, as profitability improves in the United States, this will provide signals for U.S. producers to expand production which will reduce the dependence on imported Canadian pigs.

If production continues to decrease, then at what point does Ontario production become too low to support the viability of the current Ontario processing sector capacity? If production declines too much it is likely that some processing capacity will have to be idled.

Further, from a processing perspective, smaller hog runs make it difficult to invest long term for fear of hog shortages. Processing plant efficiency estimates show that in 2009, U.S. processors operated at about 97 per cent capacity while Ontario processors averaged 90 per cent. So far in 2010, U.S. plants are running about 95 per cent while Ontario plants are down to 86 per cent.

The Ontario industry faces a fine line. If there is excess production relative to processing, then producers are at a disadvantage. If production declines too much, then processors are at a disadvantage with the risk of capacity being shut down. There also needs to be a certain volume of production to  maintain a certain critical mass and level of expertise for input suppliers (e.g. feed, health, credit, etc.). How small is too small for the Ontario pork industry? BP

Randy Duffy is a Research Associate at the University of Guelph, Ridgetown Campus.