Manitoba hog producers will have to find some friends with deep pockets if they want to fill up the province’s two large slaughter and processing plants.
Last week Schneider Corp. announced it will spend $125 million to dramatically expand its Winnipeg plant.
But that investment pales beside the $1 billion to $1.4 billion that industry observers say will be needed to crank up hog production to meet the needs of Schneider, Maple Leaf Foods Inc.and the province’s smaller processors.
“We’re not talking pocket change here,” said Darryl Hutchings, livestock consultant with Plan 2000 Management Associates.
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Clearly, hog farmers battered by the cataclysmic price trough of 1998-99 won’t have all the cash, he said.
The industry’s well-publicized bottom-line bleeding has affected investor perception, he added.
“Investment just about cratered there for two years.”
However, investors will jump back on board as hog prices recover, said John Koslowsky, president of The Puratone Corporation.
Puratone, which markets 400,000 to 450,000 hogs a year, weathered the price trough, but not without some help from a large friend.
United Grain Growers invested $8 million in Puratone last spring, and venture capital fund Ensis Management Inc. put in another $2 million.
Low prices had eroded Puratone’s working capital, and the company needed money to complete expansion plans for 1999 and 2000.
“During depressed prices, hog capital pretty much dries up,” Koslowsky said. But today, climbing hog futures prices are piquing investor interest again.
“It’s a hot item right now,” he said, pointing to last week’s announcement that the Crocus Investment Fund has put money into a Dynamic Pork production network.
Koslowsky believes the Schneider plant announcement will once again light a fire under investors.
Whether producers expand will depend on how profitable they are as prices rise, said Kevin Grier, pork analyst with the George Morris Centre in Guelph, Ont.
Grier said the new plant will eventually help narrow or even erase the spread in hog prices between Manitoba and Iowa.
“You’re radically changing the price structure in Manitoba,” he said.
“The bottom line is, more (processing) is better than less if you’re a producer.”
Manitoba production has increased even during the hard times of the last few years, he added, revealing an underlying optimism about the industry.
“Just imagine what it’s going to be like when the cycle turns, and now this (announcement by Schneider).”
Chris Hamblin, vice-president of Keystone Agricultural Producers, said hogs are a good way for grain producers to diversify.
But farmers need stronger safety nets if they are to risk their capital building barns, said Hamblin.
Pat Jones, vice-president of Maple Leaf Pork, said long-term contracts between farmers and packers, as well as a “vertically co-ordinated” approach to production, could free up more financing from lenders.
Typically, owners have to put up 35 percent of the capital needed to build or expand.
But long-term “smoothing mechanisms to take the volatility out of pricing” could give lenders confidence to supply 85 to 90 percent of the financing, Jones said.
“We’ve had a lot of our best minds working on this,” he said, adding the company is getting a good response from lenders and farmers.
More stability in prices will also give investors more confidence, Jones said.
In September, Maple Leaf bought production company Elite Swine Inc., which produces one million hogs per year.
Since 1992, Maple Leaf has bought about half the pigs produced under the Elite Swine network each week.
Hog owners in the network are free to sell their hogs where they choose. Some of them export hogs to the United States, he added.
Maple Leaf has no plans to build hog barns itself.
“We’ve always said that our business is not growing hogs.”
Douglas Dodds, chief executive officer of Schneider, said his company wants to contract with hog producers, and grow as they grow, reaching full capacity by 2007. But “time will tell” whether producers will be able to expand enough, he said.
His second choice would be to invest with producers and help them expand their operations. Otherwise, the company could look at building its own hog barns, Dodds said.
American giant Smithfield Foods Inc., the parent company of Schneider, guarantees its supplies through barns it owns, noted Hutchings.
“But I don’t see that happening for some time” in Canada, he said.
“If push comes to shove, if they need pigs, they’ll grow their own.”
For related stories see pages 19,20.
