Producers need to find a refuge from the hogs of war

Something’s wrong with Canadian hog prices and it needs to get fixed.

Right now, the market is sending the wrong signals to farmers, and bad signals equal bad decisions made on the farm.

“When we (the United States) do stupid things, you lose,” Iowa State University agricultural economist Dermot Hayes commented to me recently when looking at the messed-up situation.

“Why is Canada pricing themselves off the U.S., when we’re doing all these dumb things and you aren’t? You are discounted to us? Producers need to start asking that question.”

Indeed, they are already.

“We want a better solution so that we do not get harmed by someone else’s misfortune,” Rick Bergmann, Canadian Pork Council chair, told me in early April.

“It’s becoming extremely real now.”

The reality that’s bothering Canadian hog farmers is that of futures and many contract prices falling because of what Hayes describes as the “dumb” thing: the rising likelihood of a U.S.-China trade war. China has threatened to impose retaliatory tariffs on U.S. pork in response to any U.S. tariffs imposed on its products. U.S. futures have rationally sold off as the prospects for U.S. exports have weakened.

But Canada’s export prospects, at least to Asia, have improved, because if the U.S. loses sales to China, Canadian pork would likely fill much of that void.

However, most Canadian pork prices are based on a Midwestern U.S. price backed off to Western Canada, so Canadian prices have fallen too, despite the improved export outlook for China.

It’s not entirely unreasonable for Canadian prices to somewhat subside. Canada and the U.S. enjoy free trade, so some of the pork that might have headed from the U.S. to China might instead find its way north to Canada. American pork is already common in Canadian supermarkets, as Canadian pork is in the U.S. That’s an arbitrage that weakens the potential for a differential between Canadian and U.S. prices. Asian exports are only a piece of Canada’s exports.

And it’s not a conspiracy of the packers, most farm-side insiders believe.

“It gets quite complicated,” Andrew Dickson, Manitoba Pork Council’s general manager noted when I asked him about the situation.

“The packers have to be very careful about making changes to their formulas.”

That’s because the formulas set the prices that send the signals to farmers about whether they should be expanding or shrinking, maximizing production or laying back. If they respond too much to what could be a short-term or temporary phenomenon, they could create issues that hurt both producers and packers in the long run.

But Dickson said the industry needs to find a way to reward Canadian farmers for their efforts to make Canadian pork different than U.S. pork, or Canadian farmers won’t feel it’s worth the effort.

“We’re trying to avoid getting into one-on-one commodity marketing of pork (versus U.S. pork) because we’re not going to win at that.”

Canadian producers and packers were quick to drop using the beta agonist ractopamine when China banned imports of pork given the feed additive, while most of the U.S. industry did not. That helped sales of Canadian pork. But prices didn’t offer much reward for the effort.

Without a price reward, it’s hard to feel encouragement for actions like the elimination of ractopamine or the expansion of markets in China, and that’s what strikes Hayes as a unique problem.

“Why get rid of ractopamine? Why sign a free trade agreement with the European Union? Why not have a trade war with China?” said Hayes.

Canada benefits greatly from having its hog industry integrated with the U.S. Nobody in the industry wants to lose the focus on being a free-flowing section of an efficient North American market.

But Canada also benefits from some of the unique qualities of Canadian pork that have earned it some better markets in Asia than U.S. pork.

Packers and processors have to find a better way to reflect some of the differences because they can’t expect farmers to do something if they won’t pay them for it.

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