The transition to open marketing - producers' fears have not been realized

Tuesday, June 5, 2012

The new marketing arrangements have brought sizeable changes at Ontario Pork, but for hog producers, the transition has been relatively smooth. Even those most committed to single desk marketing say that not a lot has changed

by MARY BAXTER

Eighteen months ago, Ontario hog producers greeted their industry's shift to open marketing with either dread or relief, depending on their perspective. Everyone knew the change would be big, maybe the greatest the provincial industry had ever faced. Yet when the December 2010 deadline finally arrived, what was so surprising was how anticlimactic the transition actually was.

"We didn't even really notice it from the farming aspect," recalls Mike Huybers, who has a 1,000-sow operation between Watford and Wyoming in Lambton County. Huybers is a member of the 150-member Progressive Pork Producers Co-operative Inc., otherwise known as 3P. At the time, he was participating in a pilot project that allowed Conestoga Meat Packers, the co-operative's Breslau packing plant, to deposit payment directly into his account rather than going through Ontario Pork, as the former system required.  

Jack Kroes, who farms with his wife Marg near Clinton in Huron County, remembers being apprehensive as the shift approached. The couple farm 120 sows, farrow-to-finish, and sell them through Ontario Pork's pool plus program. "As a smaller producer, I was concerned because I don't have any marketing clout on my own and so, if the marketing division didn't get enough pigs, what would happen to the division? Would it just fold up?" he says. But, after it took place, nothing changed. He still received his payment just as he always did.

With the shift looming, Ted Keller, whose family had always shipped through pool plus, was also worried. He finishes between 3,500 and 4,000 pigs a year at his early wean-to-finish operation south of Mitchell in Perth County.

Keller was – and is – a big supporter of single desk marketing. He, too, wondered if the board's marketing arm could survive the transition. So he decided it was as good a time as any to try a different marketing arrangement and negotiated a short-term agreement with a packer. "They had some pretty good contracts coming out," he recalls.

When it came to settlement, though, there was no question about sticking with the tried and true. The risk management support Ontario Pork's newly deregulated marketing arm offered, such as credit monitoring and transaction records, provided peace of mind.

James Reesor, whose operation is centred in the Wellington, Waterloo and Perth County area, had been a vocal proponent of open marketing and, once it arrived, he began settling directly with processors. Other than that, however, "not a whole lot has changed for us," says Reesor, who uses a three-site, farrow-to-finish system to produce about 1,500 pigs for market a week. "We still have essentially the same customers under pretty well the same marketing agreements." Some of those agreements are still being settled through Ontario Pork.

Deeper in the sector's infrastructure though, the shift in principle triggered a significant and ongoing metamorphosis. At 3P, the impact has been a greater sense of comfort. "I do feel like the directors of Conestoga are more in control of their business," says Huybers, the co-operative's chair. "We don't have to ask Ontario Pork every time we want to make a change in how we pay producers or how we contract our own hogs to our own plant."

Having only to pay the fee for Ontario Pork's universal services is a savings, although not as much as was hoped. "We hope the pork board will continue to try and lower the universal fee," Huybers adds.

Staff numbers fall
Changes have, of course, been most pronounced at Ontario Pork. Staff numbers for the entire commodity organization dropped to 28 from 43 (five and a half of the current full time positions are assigned to the marketing services). As it prepared for deregulation, the organization developed new accounting protocols to separate marketing operations from the universal services. The revamped marketing service began business in January 2011 with a volume of hogs just half of its single desk predecessor's. By July, its market share plummeted to 20 per cent and today hovers between 20 and 25 per cent.

Patrick O'Neil, manager of Ontario Pork's marketing division, attributes the two-staged drop to packers who may not have been set up to do payments on their own right away. "They would have selected some of the larger farmers who were pushing for it right off the start," he explains. "Then, once their systems were proven, they started approaching other farmers to see if they wanted to opt out of Ontario Pork services and save 65 cents."

Some packers, such as Weston Abattoir Ltd., a provincially licenced plant on the outskirts of Windsor that processes 600 to 800 hogs a week, continued to negotiate through Ontario Pork. Just to put in a system to transfer data to Ontario Pork's universal services, which continues to monitor market pricing, would have cost money, explains Leo Rocheleau, the abattoir's manager. "Why rock the boat?"

He says the charges they incur for having Ontario Pork co-ordinate settlement "more than offset having to do it ourselves and mean one less headache."

Another shift was farmers being able to deal not only directly with packers but also with other licensed marketers. As of April, there were four: Zantingh Swine Inc. in Wyoming, Lambton County; John Werden Livestock Ltd. in Bothwell, Chatham-Kent; Hudson Marketing Ltd. in Manitoba; and Parks Livestock of Canada LP in Milverton, Perth County.

But the volume these marketers handle appears to be small. At least three base their business on being able to reach a particular niche or offer a convenience. Parks, for example, is an auction barn and sells cull sows and barbecue pigs to mostly local butchers.

John Nicholson, the barn's manager, says his sales volume hasn't changed since open marketing took hold, but those using his service have. "The little guys are getting fewer and farther in between." Now, he's seeing larger producers selling hogs that might not meet a packer contract's criteria. Butchers, he explains, "don't mind that stuff. They work it up and sell it over the counter."  

Before deregulation, Zantingh had established a market niche for selling light market or off-sort market hogs to buyers in the United States, the company's solicitor told the Farm Products Marketing Commission during its 2008 pork industry hearings. (A company representative could not be reached for comment for this story.)

Werden Livestock, another niche marketing operation, has sold feeder pigs into the United States for years and, since deregulation, fat pigs. Some of the producers they work with ship animals in smaller groups of 20 to 30 head a week that have to be grouped together.

"And then we have the guys that ship two or three loads a week," says Hanneke Mills, who manages this facet of the business. Most of the producers are from southwestern Ontario. She says they charge the same fee as Ontario Pork marketing services and don't lock in farmers to using their service. "We shop them (hogs) around and we always have a place for them to go, no matter what the volume is," she says.

O'Neil notes the Ontario Pork service is involved in niche markets, such as organic, humane or raised without antibiotics. He doesn't view other marketers as competition. "The fact that we're not for profit and accountable ultimately to the board and to Farm Products, that accountability means we're certainly something different from your every-day hog marketer, whatever you want to call that," he says. "What I want to package this as is basically a value-proposition to farmers."

The approach is working, he says. Although the majority of the hogs are being paid directly from the packing plant to the farm, a significant proportion of farmers are sticking with the service or returning to it because they see its value.

And, although it was initially expected that smaller producers would use the service, some larger ones see a benefit, too. James Willemse, who farms south of Parkhill in Middlesex County, ships between 7,000 and 9,000 market hogs a year through the service's pool plus program. He likes the idea of farmers receiving equal treatment and receiving the same price.

Not having to invest time in marketing or maintaining related records is also a key convenience and he adds that the program's fixed forward future contract prices come with a basis that's higher than what can be obtained in a locked-in price contract with a packer. He's also a fan of the work the service does to mitigate defaults in payment. He calls the 65-cent marketing fee "cheap insurance for me."

Pooling provides a solution
After ending a contract with Highland Packers Limited in Stoney Creek, Jake Kraayenbrink, Moorefield, enrolled in the pool plus program mostly because of convenience. The plant paid well, but shipping took place in the middle of the night. "We're not big enough to make any real deals with anybody," he says. "Ontario Pork has just as good an offer as anybody else does."

Moreover, since the operation also produces breeding stock, it doesn't generate the consistent numbers plants often prefer. Pooling with others provides a solution to this problem, and then there are the other services offered, such as maintaining sales records and risk management.

Several people spoken to felt Ontario Pork's pool plus program has improved since deregulation. Before, animals were sometimes left behind in the barn if sales were slow.  Keller had experienced that problem several times, "but I'm finding now that nobody's having any trouble getting their pigs out." He adds that he's considering returning to the program once his contract ends.

A shortage of pigs in the province may be a factor in improved pickup rates, but Kroes observes that the marketing division has been "fairly aggressive." They've signed up "some pretty good contracts," he explains, "so we're benefitting from that."

There had been interest in developing a financial protection program similar to the one that shields Ontario's beef producers from defaults in payment but, in November, Ontario Pork's board decided not to pursue it. The challenge of obtaining government support in the current economic climate and a significant portion of the industry being reluctant to pay for such a plan were among the reasons behind the board's decision, notes Mary Jane Quinn, Ontario Pork's senior marketing communications leader, in an April 26 email. There are questions about how protected Ontario Pork's marketing arm data really is from potential competing interests. Most of all, there's a lot of discomfort about the new way of price reporting. Keller says the high prices reflect those earned by niche products such as organic, humane and pasture-fed pork, which come with much higher costs of production. Sales figures can therefore be misleading.

"I've had banking representatives say, ‘well, jeez, that price is pretty high,'" he says. "I say, ‘well yeah, but it's a niche market and if everybody did niche markets, that price would drop.'"

Quinn explains that the board changed the approach to price reporting this year because a 2011 study it commissioned indicated there was very little difference in the numbers when they were drawn from either just standard (commodity) hogs or from the combination of standard and specialty (for example organic, humane, raised without antibiotics and futures-sold hogs). The new reports use the average price value of the middle 70 per cent of hogs reported with the low price being the average value of the bottom 15 per cent of hogs reported and the high price being the average value of the top 15 per cent.

Keller and Kroes, who are both active on their county associations, also observe that there's a lack of focus at county meetings now that the board's marketing responsibilities are gone. Attendance has been sparse at meetings over the past winter, says Keller.

By and large, though, producers say the new system works well. There have been no emergencies, notes Reesor, and the transition was smooth. Without having to market all the hogs in the province, Ontario Pork's marketing arm's job is "a good deal easier now," he adds.

Now, it's time "to rest and just let systems develop," he says. "This is our opportunity as producers to figure out what it means to work together co-operatively and what are the things that we should do. Everyone has made their own choices on how they wish to market and feel comfortable and are willing to give it time." BP