Overview

The production and marketing of hogs is a major enterprise within Canadian agriculture. At one time, the most common type of operation was a medium-sized family farm with hog production as a primary activity, typically a 100-200 sow, farrow-to-finish operation. However, large-scale production businesses comprising specialized breeding stock operations, gilt multipliers, weaner pig operations, and grower-finisher operations are increasingly common within the hog industry. The hog industry has become highly concentrated and it is not uncommon to find production systems that produce in excess of 100,000 pigs per year.

Structure and size of the market

Hogs are produced in significant quantities in all provinces except Newfoundland-Labrador. (See Table 1, below)

Table 1: Distribution of Market-Weight Hogs by Province

Statistics Canada, 2001 Cat. No. 95FO-301-XIE; October 2006, Hog statistics, Cat. No. 23-010-XIE

Market Characteristics

The pork industry in Canada has two major processors: Maple Leaf Foods and Olymel. Also the sector is export oriented with more than 55% of total production being sold to over 100 countries. Canada is now the world’s third largest pork exporter following the E.U. and the U.S. The U.S. and Japan are by far the largest destinations, receiving 42% and 36% of Canadian exports respectively. No other destination receives more than 10%. Substantial numbers of live slaughter hogs are also exported, particularly from Western Canada to processing plants in South Dakota, Wisconsin and Iowa.

The variety of export markets is positive for Canadian hog marketers in two ways. It tends to smooth out inherent price volatility; also the different markets have a variety of preferences. This allows processors to sell different types of hog, pork cuts and pork byproducts at better prices than would otherwise be the case.

Hogs[1] and pork trade freely in the North American market, hence hog production and processing operates as a single market. Prices are set by competitive bidding in major U.S. markets (Iowa-Minnesota). Prices in Canada, including prices established on provincial markets by competitive bidding, are established using these U.S. prices as a basis.

Hogs supplies are fairly constant throughout the year, with some seasonality. Prices usually rise from April to June, and fall from August to October. Prices are established, and change, day by day. Processing plants operate five or six days a week, and may double shift. This presents “lumpy” demand in some local markets, where supply is too much for one shift and insufficient for two.

Marketing Options

Hog producers in Canada have several marketing options. All options are not available in all provinces depending on the marketing regulations prescribed by the individual province. These are described as follows:

• Nova Scotia Pork is the exclusive marketing agent for pork in that province. There is one federally inspected facility and hog prices are set weekly using a formula based on the Ontario price.
• Prince Edward Island also has a marketing board that acts as the exclusive marketing agent for all hogs. The province also has a federally inspected facility. Prices there are set using a formula based on the (Chicago Mercantile Exchange) CME prices.
• Producers in New Brunswick sell directly to processors, at negotiated prices on an individual transaction basis.
• Quebec has a hybrid marketing system. All market hogs with a few exceptions are required to be marketed through the Federation of Quebec Pork Producers. The exceptions are those hogs that are substantially differentiated (e.g. off the weight grid). About 50% are allocated daily according to historic requirements and are formula-priced. About 25% are allocated monthly, again according to historic requirements. The remainder is auctioned. Receipts are “pooled” so that all producers marketing hogs in a week receive the same price, subject to adjustments for quality parameters, also known as the “grid”.
• In Ontario, Ontario Pork also operates as a single-desk selling agency. Ontario producers are free to contract directly with packer with contracts subject to Ontario Pork approval. Ontario Pork offers a number of options for hog producers. Producers can simply deliver hogs to country assembly yards. Ontario Pork markets the pigs by auction, and producers are paid the pool (average) price for the week. Ontario Pork also offers a variety of contracts for set numbers of hogs to be delivered at certain future dates, with partially predetermined prices. This serves to remove some of the price uncertainty for both packers and producers.
• In Manitoba, Saskatchewan and Alberta producers are free to make any marketing arrangements either directly with the processor or by selling through producer marketing organizations. These are the Manitoba Pork Marketing, Saskatchewan Pork International (SPI) Marketing Group, and the Western Hog Exchange – all producer-owned co-ops and in turn the three largest marketing agents in the Western Provinces. Each organization offers formula pricing and other marketing arrangements designed to reduce market risk.
• BC Hog Marketing Commission (BCHMC) is a central selling desk, i.e. all sales from registered commercial producers (sales of more than 300 hogs annually) are sold by the BCHMC. Sales are pooled weekly, and prices are set using a formula based on U.S. and Alberta market prices.

In general, whether producer pool marketing is compulsory or not, the pools offer a similar package of services including:

· Producer payment security;

· Producer delivery contract negotiations;

· Producer grading grid contract negotiations ;

· Ensuring and providing accurate grading data ;

· Represent producers in settlement inquiries;

· Daily marketing of hogs;

· Operation of assembly yards;

· Market information service;

· Low cost in-transit insurance of market hogs;

· Settlement systems for all hogs sold;

· Free accounting service for truckers and assemblers; and

· A comprehensive Forward Price Hog Contracting program.

Markets are affected by processing capacity. Hog processing facilities and capacities are subject to change as processors seek to improve efficiency and reduce costs. Live hogs can be transported for up to 36 hours. However, if at all possible, it is preferred to market to nearby processors to minimize shrink and stress to the hogs. As major processors continue to rationalize facilities, changes will occur to the local market conditions as well as the options available to producers.

Key Changes or Recent Issues

Three key changes currently occurring within the industry are of particular significance:

1. The changing structure of production – increasingly hog production is in the hands of large-scale businesses that operate in a coordinated manner comprising contractual arrangements with genetic suppliers, farmers who produce pigs on their behalf, feed companies and processors. These businesses are able to supply large volumes of consistent quality hogs.

1. Processor concentration – as noted earlier, the Canadian market has two major processors who account for almost 90% of all hog purchases.

1. Long term competitiveness – the Canadian industry has grown very quickly over the past 20 years due to favourable grain prices and exchange rates. These conditions have changed in the past the two years placing the industry in a much tighter margin situation.

Thus, the future of the independent hog producer is increasingly difficult.

Other changes are in motion. For example, because of the increasing need for traceability, identification protocols for slaughter hogs are in place. The National Hog Identification and Traceability System is a project currently in progress, administered by provincial pork industry organizations. Each premise is required to be registered. All pigs that leave the premises are required to bear a unique 5 digit number, as a shoulder slap tattoo.

Price Discovery

The base price paid for hogs is established in the U.S. Everything works back from this price. If supplies are tight, buyers are more aggressive and the price of hogs increases; if supplies are heavy, the reverse effects occur. A major factor affecting the price of hogs is the price of feed which is the major input cost. Hog prices are also affected by local, domestic, and global market factors, which change frequently. Therefore, prices can and do vary considerably.

Futures contracts are available on U.S. markets for hedging purposes. These contract prices also provide guidance to price trends. All other pricing works back from these prices. The difference between the specified futures price (the current cash price quoted in Chicago) and the price being offered in a local market is known as the basis. In a perfect market, the basis should be the cost of transporting/transacting hogs from the local market to the Chicago market. However, this difference will vary by many other factors including local supplies, local demand, the packers killing schedules, etc. Knowledge of the basis and managing what is known as the ‘basis risk’ is critical to obtaining the best prices for market hogs.

Key Quality Issues

The primary quality issue is hog health. It is paramount that market hogs be healthy, and that all treatment and withdrawal protocols have been observed.

Quality is generally defined by grid parameters which vary to some extent from province to province. Individual packers may have their own grids for hogs they buy directly. The grid parameters always include leanness and weight, and often include an additional premium for ideal loin eye size. The size and placement of discounts and premiums on the grid are subject to revision as consumer markets change.

Other quality issues include the absence of bruising relate to the quality of handling of hogs on trucks, at assembly yards, and at the processing facility.

Another food safety program is the Certified Quality Assurance (CQA) program, administered by the Canadian Pork Council. It is a voluntary HACCP protocol, verified by local veterinarians. Some marketing arrangements require CQA verification.

Risk Factors

Disease is a chronic and perennial problem. Hog production tends to concentrate in clusters, and disease spreads quickly within these clusters. Biosecurity issues are a growing concern.

Because pork is an unregulated commodity in North America, anyone is free to enter the pork business at any time. Also, the market and production of pork is tied to the overall economy in so many ways that there is scarcely an event that does not affect the price of pork. Further, because of the scale of global trade in pork, events and conditions anywhere in the world have an effect on prices.

If a number of negative or positive factors combine at a particular time, the pork prices can change quickly and can therefore be volatile and subject to rapid change. Major factors affecting price include:

• Supply of pork;
• Feed grain prices;
• Disease outbreaks;
• Trade conditions;
• Political conditions;
• Dollar exchange rates;
• Prices of competing products e.g. chicken and imported beef;
• Overall economic conditions; and
• Consumer trends.

The price of feed is a major risk factor for hog producers. The largest determinant of feed prices is the price of corn in major U.S. markets. Feed prices are determined by a complex set of interrelated factors, one of which is the numbers of cattle on feed. Exchange rates, determined mostly by energy prices, have a direct effect on the price of pork, feed grains and hence the price of pigs.

Hog farming is often subject to negative publicity due to public perception that hog manure poses a severe environmental hazard. There are also concerns with intensive housing, and the social implications as smaller operations leave the industry and are replaced with large corporate operations.

The pace of technological change is rapid. Rationalization of the industry is a continuing trend. Increasing numbers of hogs are in captive supply arrangements with major corporations, making entry to this market more challenging. In addition the global trade in pork continues to increase.

Other Factors

In the U.S. and to a lesser extent in Canada, processors have been directly involved in the production of pigs. While this is not in and of itself positive or negative for hog prices, it is a structural trend for entry. Margins have become narrower, prices more volatile, and the minimum efficient scale of hog production units continues to increase. Barriers to entry include environmental hurdles, large capital requirements and access to market – namely, the ability to sell to a processor.

Closing Comments

In summary, hog production is a highly specialized enterprise within a concentrated industry. Any prospective hog producer must begin with the market (the processor) and identify the production systems that are in place to supply that processor. This process is necessary to determine which ‘systems’ are available and how the hog producer may fit into the system. In effect, the market opportunities must be evaluated in light of the system options and the contractual arrangements that define them.

The production and marketing of hogs has truly become a large-scale industrial market. Further hog production in Canada is an integral part of a North American and global industry. Canada produces more than twice as much as it consumes. Thus export marketing is critical to the industry. Live hogs and pork products move back and forth over the border without duty. As a result, the price of any hogs at any time and place in Canada is established by using U.S. prices. All single-desk marketing systems use a formula that is tied to this price.

[1] Live hogs move from Canada into the U.S. but not in reverse due to animal health restrictions.