1. “Opening the Throttle and Applying the
Brakes: The Disconnected Policy to Support
(Stifle) the Canadian Pork Sector”: a Review
for Internal Discussion
Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities Inc.
November 2009
2. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 2 victor.aideyan@hisgraiincommodities.com
Table of Contents
Introduction.......................................................................................................................................... 3
Conclusion “1” Response..................................................................................................................... 4
Historical and Current COP Estimates for the Ontario Hog Sector.................................................... 4
Conclusion “2” Response..................................................................................................................... 7
Conclusion “3” Response..................................................................................................................... 8
Summary ............................................................................................................................................. 8
Appendix.......................................................................................................................................... 10
3. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 3 victor.aideyan@hisgraiincommodities.com
Introduction
In August 2009 Senior Research Associate Al Mussel, and Research Fellow Ted Bilyea of the George
Morris Centre (GMC) authored a paper titled “Opening the Throttle and Applying the Brakes: The
Disconnected Policy to Support (Stifle) the Canadian Pork Sector”. This is a review of that paper. As in
previous reviews, I will assess the validity of business impact statements and conclusions reached by
that GMC report.
Major conclusions extracted from paper titled “Opening the Throttle and Applying the Brakes:
The Disconnected Policy to Support (Stifle) the Canadian Pork Sector” by Al Mussell and Ted
Bilyea – August 2009.
1. That the Canadian red meat sector in general and the pork sector in particular continue to
suffer a prolonged period of financial losses. Furthermore, Mussel and Bilyea directly and
indirectly indicate that such pork industry losses are due to ethanol production IN CANADA
2. That Canada’s “natural” comparative advantage is being structurally eroded by policy backing
ethanol production.
3. That the Canadian pork segment is in a particularly difficult situation and that the prospects for
immediate improvement are dim due to factors such as U.S. Country of Origin Labelling, a glut
of pork in world markets, and a structurally stronger Canadian currency which reduces
revenue. Mussel and Bilyea then go ahead and endorse the Canadian Pork Industry Recovery
Plan
In this paper I will address these conclusions one at a time, highlighting areas of agreement and
difference. Furthermore, I will offer some observations on the viability, contributions and policy
considerations concerning the hog industry in Canada and Ontario.
4. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 4 victor.aideyan@hisgraiincommodities.com
Conclusion “1” Response
The Canadian swine industry is indeed facing a prolonged period of financial losses. In the past year,
Statistics Canada (Stats Can) Quarterly Hogs and Pigs reports have indicated a continued trend of
contraction in the Canadian swine herd, and in the number of hog operations in Canada. In their
October 2009 Hog Statistics report, Stats Can clearly states that as at the third quarter of 2009,
Canadian hog inventories declined by about 7% compared to the same time year prior. In that
quarterly report, Stats Can attributed the contraction in hog inventories mainly to low market prices,
the restructuring of farms and to farm closures. We agree that it is reasonable to conclude that a
profitable industry, not subject to expansion barriers, would be stable or growing and not shrinking as
evidenced in the Canadian swine industry.
In “Opening the Throttle and Applying the Brakes: The Disconnected Policy to Support (Stifle) the
Canadian Pork Sector” the GMC authors state that “Canadian hog producers have been suffering
losses said to be in the range of $40/hog”. Table 1 below is a reproduction of Al Mussell and Ted
Bilyea’s own Annual Cost and Returns table for the Saskatchewan Hog Industry as illustrated in
“Opening the Throttle”. Based on these GMC estimates, average losses in the hog industry since
2007 is closer to $26/hog.
Table1: George Morris Centre Saskatchewan Hog Production Costs and Returns Table, August 2009
Market
Hog
Revenue/
Hog
Feed
Cost/
Hog
Variable
Cost/
Hog
Contribution
Margin
Total
Cost/
Hog
Net
Profit/
Hog
2000 $158.70 $55.57 $106.76 $51.94 $126.03 $32.67
2001 $163.47 $62.96 $114.20 $49.27 $133.48 $29.99
2002 $126.39 $72.32 $121.04 $5.35 $140.32 ($13.93)
2003 $126.14 $68.70 $117.49 $8.65 $136.77 ($10.63)
2004 $154.51 $64.69 $114.93 $39.58 $134.21 $20.30
2005 $139.57 $53.08 $102.39 $37.18 $121.66 $17.91
2006 $126.30 $54.56 $103.44 $22.86 $122.72 $3.58
2007 $121.93 $71.68 $120.67 $1.26 $139.95 ($18.02)
2008 $124.66 $93.95 $143.00 ($18.34) $162.28 ($37.62)
2009 $135.41 $88.84 $137.86 ($2.45) $157.14 ($21.73)
Source: George Morris Centre Hog Costs and
Returns Model
GMC’s estimates show a profitable hog industry from 2004 to 2006 and losses beginning in 2007.
Historical and Current COP Estimates for the Ontario Hog Sector
The Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) have some excellent Cost of
Production estimates for Ontario hog production available at:
5. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 5 victor.aideyan@hisgraiincommodities.com
http://www.omafra.gov.on.ca/english/livestock/swine/finmark.html
Budget summaries for 2002 through 2009 are available as well as recent hog COP estimates for
October 2009. Below are OMAFRA’s annual budget estimates for 2002-20091
Table 2: OMAFRA Farrow to Finish Swine Enterprise Budget Estimates for 2002-2009
Summary 2002 2003 2004 2005 2006 2007 2008 2009
Market HogValue $137.03 $137.17 $164.12 $149.34 $131.93 $127.08 $128.15 $124.36
FeedCost $84.93 $87.41 $86.55 $70.03 $70.91 $85.50 $104.00 $103.51
OtherVariable Costs $37.56 $37.57 $35.12 $37.47 $37.92 $42.21 $42.41 $40.35
FixedCosts $24.66 $26.42 $23.69 $27.40 $25.20 $24.88 $21.06 $20.85
Total Cost perHog $147.15 $151.40 $145.36 $134.90 $134.03 $152.59 $167.47 $164.71
Net Return ($10.13) ($14.23) $18.76 $14.44 ($2.10) ($25.51) ($39.32) ($40.35)
$per pig $52.10 $49.76 $77.57 $79.31 $61.02 $41.58 $24.15 $20.85
Variable Costs $125.95 $127.80 $124.22 $108.23 $108.74 $126.64 $144.59 $141.76
Total Costs $151.31 $154.82 $148.41 $135.82 $133.91 $151.32 $165.38 $162.31
**** 100Indexmarket hogcalculated usingthe average monthlydressed weight and index
CalculatedReturnOverFeedCosts(market HogValue lessFeedCosts)
CalculatedBreakevenPrices($/ckg, 100index) tocover
Source: OMAFRA Farrow to Finish Swine Enterprise Budget estimates for 2002-2009
OMAFRA’s Ontario variable cost estimates are well developed and do not differ markedly from GMC’s
Saskatchewan based estimates or our estimates for 20092
.
Our variable cost estimates for third quarter (to date) 2009 are further expanded to show estimates of
hog finisher feed cost using a basic corn soybean meal based ration3
.
Hog feed rations vary considerably swinging from “traditional” added fat diets to no-fat diets and diets
including varying levels of DDGs and alternative energy sources (wheat, wheat shorts etc). The
grower diet in appendix 4 is a relatively corn rich grower level hog diet and is therefore more
influenced by the cost of corn.
Appendix 2 below shows fourth quarter Ontario hog COP estimates when grower feed costs are
adjusted with the cost of corn in the feed ration reduced to zero. In such a scenario the breakeven
price for finished hogs is about $1.19/kg (100 Index, 90 kg carcass, grading at 108 of Index). When
only variable costs are considered, the breakeven hog price falls to $1.09/kg, 100 Index.
Our analysis leads us to the conclusion that as Ontario hog prices drop below $1.09/kg, with other
costs held steady at current levels, even reducing corn input prices to zero would still have the Ontario
hog industry suffering negative contribution margins. Similarly, hog prices below $1.19/kg are
unprofitable (using TOTAL cost estimates) even with zero cost corn4
.
1 2009 estimates are for the year from January through October
2 See the Ontario COP estimates for hogs going to market in October-November 2009 in Appendix 1 below
3 See Appendix 4 below
4 Prices are 100 Index, 90 kg carcass grading at 108 of index
6. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 6 victor.aideyan@hisgraiincommodities.com
Note: For maximum cost containment and profitability in the livestock industry, “cheap” corn is
certainly very desirable. However, “cheap” corn alone is not enough to achieve profitability; there are
other cost and profit drivers that can, singly or in combination, eliminate profitability no matter how
“cheap” corn becomes e.g. Soybean meal cost, fixed costs such as infrastructure costs, labour etc and
most importantly the selling price for livestock.
We cannot therefore accept the conclusion reached by Al Mussell and Ted Bilyea that high corn costs
(via stronger local Basis) driven by demand from the Canadian ethanol industry is responsible for the
financial losses currently being suffered by the hog industry.
It is important to note that the Canadian and U.S. hog industries have suffered periods of extended
financial losses before: 2002-2003; fall 1998 to mid 1999 were just such periods. We should note that
there was no significant ethanol industry in Canada during the 1998-1999 period. Even the U.S.
ethanol industry was less than one fifth the size it is today in 1999. The 1998-1999 financial losses
suffered by the hog industries in Canada and the U.S. were in fact caused by extraordinarily low hog
prices, similar to those we are once again experiencing.
In its own analysis in the October 2009 hogs report Stats Canada states clearly that “the main factors
in the decline (in the hog industry’s inventory) were low market prices ... and farm closures” words in
italics are mine.
Our conclusion:
Ontario hog industry losses are being driven primarily by low hog prices. A sharp weakening in
Ontario corn Basis would probably reduce the level of losses in the industry for a while but sustained
profitability for the Ontario hog industry can only be achieved through
• Reduction of the overall cost structure of the Ontario hog industry to improve competitiveness.
Here we refer to non-feed input costs
• And yes, improved hog prices
We can appreciate how some observers reach the conclusion that the competitiveness and
profitability of the Ontario hog industry would be improved by reducing ethanol based competition for
corn within Ontario. The logic is that reduced local demand for corn leads to a weaker Basis and
therefore relatively cheaper corn in Ontario. There is a significant problem with this line of thought:
potential expansion of the nearby U.S. ethanol industry.
If Ontario corn Basis weakens and local corn prices fall relative to nearby U.S. states in an
environment where U.S. ethanol plants are highly profitable (the current situation) we should expect
the development of further U.S. ethanol plants close to Ontario’s borders and increased export of
Ontario corn to such plants. In effect, Canadian ethanol industry jobs become U.S. ethanol industry
jobs. Ethanol producers’ margins and the incentive for expansion are after all largely driven by energy
prices (crude oil and gasoline). As long as such energy prices are high enough, the U.S. corn ethanol
industry will be able to compete for corn supplies at home and from nearby Canadian provinces.
Furthermore, within the current NAFTA and free trade framework, there is very little that Canadian
government policy can do to stop the flow of corn out of Ontario, or to stop U.S. ethanol production
from replacing any drop in Canadian ethanol production.
Bottom line: “cheaper” Ontario corn would, at best, provide a temporary reduction in the pace of losses
in the hog industry and would eventually encourage the development of nearby U.S. ethanol plants
and corn exports to such plants from Ontario.
7. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 7 victor.aideyan@hisgraiincommodities.com
Conclusion “2” Response
Al Mussell and Ted Bilyea suggest Canada’s “natural” comparative advantage in pork production is
being structurally eroded by Canadian policy backing Canadian ethanol production. Once again the
implication is that Canadian ethanol production has led to higher local prices for corn through the
mechanism of stronger local corn Basis, and that this stronger Basis is the cause of losses in the
Canadian hog industry.
The evidence over the past four years does not support this view. Chart 1 below shows the actual
annual Chatham track5
average corn Basis between 2000 and 20086
. Since 2002 annualized
Chatham track average corn BASIS has weakened i.e. has moved in a direction to the advantage of
corn users (indicating a move towards an export BASIS).
Chart 1: Chatham Ontario Average BASIS: Annual Simple Averages
Source: Ontario Corn Producers Association data series.
And yet actual Ontario corn prices are indeed higher in 2009 compared to 2002. Higher Ontario corn
prices since 2005 have been driven almost exclusively by higher Chicago Board of Trade (CBOT) corn
prices. Internationally set CBOT corn prices can only minimally (if at all) be influenced by Canadian
ethanol policy or indeed by Canadian ethanol production at its present size.
The Conclusion: Ontario corn prices are a function of the CBOT corn futures price plus Ontario Basis.
Between 2005 and 2008 Ontario Basis has been trending lower (moving to an export Basis). Higher
corn prices in Ontario during the 2005-2009 period are therefore not due to a stronger local Basis (or
for that matter the Ontario ethanol industry) but rather have been due to higher CBOT commodity
price.
5 Chatham is a major benchmark for corn BASIS in Ontario and is a good benchmark for corn BASIS trend in the province
6 Each “year” runs from October through September of the following calendar year e.g. the “year” 2000 runs from October 2000
through September 2001. Year 2008 is from October 2008 through September 2009
8. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 8 victor.aideyan@hisgraiincommodities.com
Furthermore, from our analysis in “1” above I conclude that any erosion of Canada’s comparative
advantage in pork production (compared to the U.S.) is due to the current higher overall cost structure
for the Canadian hog industry compared to the U.S. industry.
Conclusion “3” Response
I agree that the Canadian pork segment is indeed in a particularly difficult situation. Persistent losses
over the past 2-3 years has seriously eroded equity in the industry, has led to significant contraction in
the sector7
, and has caused untold hardships among family run hog businesses.
Mussel and Bilyea indicate that any chance of a quick return to profitability by the Canadian hog
production industry is hindered by factors such as:
• U.S. Country of Origin Labelling
• A glut of pork in world markets
• The impact of a stronger Canadian dollar exchange rate (vs. the US$) on hog prices
These are indeed impediments to a quick return to profitability for the Canadian industry.
Unfortunately, these are also factors that are outside the control of both the industry itself and policy
makers in Ottawa. The industry is therefore faced with limiting factors beyond its control.
I agree with Mussel and Bilyea and endorse the pork industries request for support through the
Canadian Pork Industry Recovery Plan. I go even further and argue that the pork and beef production
sectors are a critical part of the Canadian animal protein industry which is of strategic importance to
the continued well being and prosperity of Canadian citizens. The industry, in our opinion, is a critical
industry and a valid candidate for more public sector assistance as it restructures to weather the
current challenges and position for renewed and sustained profitability.
Summary
From about 2006, the Ontario hog industry has had an extended period of losses due to factors
beyond its control. This situation has caused contraction of production and considerable hardship in
the industry. An examination of the cost and revenue sides of the business since 2005 leads
inexorably to the conclusion that low sales prices caused by a stronger C$ to US$ exchange rate is
the primary reason for the industry’s financial losses8
. Average Ontario corn prices between 2006-
2009 (year to date) have indeed been higher than the average price during the preceding four year
period (2002-2005) but that increase is not due to stronger average Ontario corn Basis and therefore
cannot be blamed on increases in local demand from industrial users. Increases in Ontario corn
prices during the period have been primarily due to increases in the CBOT component of Ontario corn
price.
We agree with Mussel and Bilyea’s conclusion that the Ontario hog industry should receive public
sector assistance as it restructures to weather the current challenges. It is evident, that the Ontario
7 Stats Can October 2009 Hog Statistics report indicates a 7% reduction in hog inventories compared to same time year prior and
a drop in the number of Canadian hog farm operation from 8,500 to 7,700
8 Appendix 3 below is a matrix illustrating the impact of a sliding C$ to US$ exchange rate on various U.S. hog index prices. One
of the takeaways is that at a par exchange rate and current hog COP, the U.S. hog price required to cover variable costs is
more than US$78/cwt carcass.
9. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 9 victor.aideyan@hisgraiincommodities.com
hog industry is facing a period when adjustments in the costs structure of the industry are needed to
reposition the industry for sustainable profitability. Analysis of the changes in the comparative cost
structures of the U.S. and Ontario hog industry and development of a strategy for improving the
Ontario hog industry’s cost competitiveness is outside the scope of this current report but certainly
needs to be examined by stakeholders in the industry.
10. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 10 victor.aideyan@hisgraiincommodities.com
Appendix
Appendix 1
Estimated Cost of Production and Profitability for Hogs going to Market in November, 2009
Finbyte$ - Finishing Enterprise Budget
Based on
Cash Income $/ckg1
3059 Market Pigs @ 104 per ckg, 108 index, 90 kg………………………… 104.00$
Other Income - ……………………………..………….……………………… -
Total Cash Income…………………………………...………… 104.00$
Variable Cash Expenses $/ckg
793.7 tonnes of Grower-Finisher Feed @$261.951555772994 per tonne… 69.92$
3154 Feeder Pigs @ $2.2 per kg @ 24.5 kg with a 3% Death Loss…….. 57.17
Health (Vet & Medicine)…………………...……………..…………………… 2.57
Marketing & Trucking (In and Out)…………………………………………… 3.09
Barn Supplies………………………………..……………….………………… 0.40
Custom Work (ie. Manure Handling)………...………………………………… 1.21
Labour (Wages, Benefits, Salaries)………………..………………………… 4.04
Building & Equipment Repair………………………………….…..…………. 0.94
Fuel (Vehicle)……………………………………….………………...………… 0.20
Telephone………………………………..………………...…………………… 0.20
Utilities (Hydro & Gas)…………………….……..……………………………… 1.13
Vehicle (Repairs, Licence, etc.)……………..…………...…………………… 0.67
Acounting/Legal/Office……………………..………………..………………… 0.34
Other (Miscellaneous)……………………..………………...………………… 0.20
Operating Loan Interest @ 7.25%……………………………………………… 2.68
Total Variable Cash Expenses……………………………… 144.77$
Fixed Cash Expenses $/ckg
Term Loan Principal Payments……………….……...…………………. 4.15$
Term Loan Interest Payments…………………………..…………………… 7.63
Insurance (Buildings, Equipment, Livestock, Liability)………………..…… 0.50
Property Taxes………………………….……………………………...……… 0.27
Leases (Buildings, Equipment or Land)……………………………..……… -
Total Fixed Cash Expenses……………………………..…… 12.55$
Total Variable & Fixed Cash Expenses……………..……… 157.33$
Net Cash Return Before Taxes……………………………… (53.33)$
Breakeven Cash Price ($/ckg @ 100 Index)……………… 157.33$
Finbyte$ is an OMAFRA Hog Finish Enterprise Budgetary Tool
11. Author: Victor Aideyan, Senior Consultant, HISGRAIIN Commodities
P a g e | 11 victor.aideyan@hisgraiincommodities.com
Appendix 2
Estimated COP and Profitability for Hogs going to Market in November, 2009
WITH ZERO CORN COST IN GROWER RATION
Finbyte$ - Finishing Enterprise Budget
Based on
Cash Income $/ckg1
3059 Market Pigs @ 104 per ckg, 108 index, 90 kg………………………… 104.00$
Other Income - ……………………………..………….……………………… -
Total Cash Income…………………………………...………… 104.00$
Variable Cash Expenses $/ckg
793.7 tonnes of Grower-Finisher Feed @$129.5 per tonne………………. 34.57$
3154 Feeder Pigs @ $2.2 per kg @ 24.5 kg with a 3% Death Loss…….. 57.17
Health (Vet & Medicine)…………………...……………..…………………… 2.57
Marketing & Trucking (In and Out)…………………………………………… 3.09
Barn Supplies………………………………..……………….………………… 0.40
Custom Work (ie. Manure Handling)………...………………………………… 1.21
Labour (Wages, Benefits, Salaries)………………..………………………… 4.04
Building & Equipment Repair………………………………….…..…………. 0.94
Fuel (Vehicle)……………………………………….………………...………… 0.20
Telephone………………………………..………………...…………………… 0.20
Utilities (Hydro & Gas)…………………….……..……………………………… 1.13
Vehicle (Repairs, Licence, etc.)……………..…………...…………………… 0.67
Acounting/Legal/Office……………………..………………..………………… 0.34
Other (Miscellaneous)……………………..………………...………………… 0.20
Operating Loan Interest @ 7.25%……………………………………………… 1.93
Total Variable Cash Expenses……………………………… 108.67$
Fixed Cash Expenses $/ckg
Term Loan Principal Payments……………….……...…………………. 4.15$
Term Loan Interest Payments…………………………..…………………… 7.63
Insurance (Buildings, Equipment, Livestock, Liability)………………..…… 0.50
Property Taxes………………………….……………………………...……… 0.27
Leases (Buildings, Equipment or Land)……………………………..……… -
Total Fixed Cash Expenses……………………………..…… 12.55$
Total Variable & Fixed Cash Expenses……………..……… 121.23$
Net Cash Return Before Taxes……………………………… (17.23)$
Breakeven Cash Price ($/ckg @ 100 Index)……………… 121.23$
Finbyte$ is an OMAFRA Hog Finish Enterprise Budgetary Tool
