A couple of years ago, with the Asian hunger for pork growing as fast as its booming economies, hog production seemed like a sensible investment.
And with some of the lowest cost feed in the world, Western Canada seemed the ideal place to raise pigs.
But with the collapse of the southeast Asian economies and massive investment in pork production in the United States leading to oversupply and poor prices, are hog barns still a prudent investment?
“Probably everybody is asking what’s the long-term outlook,” said University of Saskatchewan agricultural economist Gary Storey. “Did we get it wrong?”
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It’s not an easy time for people with a lot of money tied up in hog barns. Most analysts say low prices could last two more years.
Prices now are already under most producer’s break even point and drop more in the next few months. That means most hog farmers won’t be making money for a long time, and investors in the large-scale hog barns won’t see profits any time soon.
The hog industry is asking itself whether this is a typical, if severe, downturn, or if it is entering a period of structural instability.
Some producers are confident their decision to invest in hog production will pay off, regardless of the present price slump.
“It doesn’t bother me,” said Neilburg, Sask., farmer Kim Puttnam, who last year invested in a 2,400-sow barn that will produce its first market pigs in the next few weeks. “You just ride them out.”
Puttnam said he produced pigs on a smaller scale for years, and knows about the price cycle. He believes the Asian crisis and heavy U.S. production mean this downturn will be more severe than most, but it doesn’t change his long-term view that the Canadian Prairies is the best place to produce pigs.
But the breezy confidence of hog industry promoters sits poorly with Guernsey, Sask., pig farmer Bruce Owen. He thinks promotors have overstated the world’s potential to swallow pork.
“I think I’m in an industry now that’s being largely peopled by lunatics,” said Owen, who owns a 90-sow, farrow-to-finish operation.
“They can’t see the relationship between oversupply in the market and poor prices.”
While Owen said the recent flood of investment into hog production has been ill advised and suggests other motives are at work.
“They’re positioning themselves in the industry for when everyone else is gone,” said Owen. The family pig farm is the likely victim of the present price downturn. “They’re just going for broke.”
Usually, low prices push many producers out of the industry until prices recover. These “in and outer” producers allow oversupply to be corrected, economists say.
But the new, large barns are often heavily debt financed, and it is probably not worth their while to shut down, said Storey.
Small producers raising only 14 to 16 pigs per sow a year have high variable costs and poor feed efficiency, Storey said. Yet their barns are paid off and the buildings are depreciated to the point that they can shut down for a year or two at little cost, allowing the producer to avoid the worst of the downturn.
The new large barns produce more hogs per sow, giving them a low variable cost, but they carry a high debt, Storey said. With so much cost coming from the buildings and less from the pigs themselves, it makes sense to keep producing hogs throughout the cycle, to squeeze whatever revenue they can from the investment.
Owen thinks an extended price drop will drive family hog farms out of the industry and leave everything to large units. He has much less debt than the large-scale barns, so he can produce pigs at a profit while they’re making a loss. He’s making money now.
But if prices are bad for too many years, he doesn’t see how his barn can be viable.
“I’m not hopeful,” Owen said. “I don’t see how our market can recover.”
But Storey said prairie farmers should keep their problems in perspective.
“If we’re in trouble, somebody else is in a lot more trouble,” he said. “The basic comparative and competitive advantages we have in this region still holds. Nothing has changed there.”
Prairie feed is still cheaper than elsewhere, disease is less of a problem, and there is room for more pigs. That means when the present price slump is over, the industry here will be less bloodied.
Brad Marceniuk of Pork Central, the Saskatchewan government’s hog industry promotion agency, said producers should still make 14 to 15 percent returns on hog barns in the long term.
Storey can understand why investors facing poor pig prices, fallen demand and a shaky stock market might be shy.
“If there are capital hog projects sitting there waiting to go, it may be prudent to wait and watch what happens in the next six to eight months.”
But in the long term, hog barns are still good prairie investments, Storey said.
That’s the message Saskatchewan agriculture minister Eric Upshall has been communicating.
“I’m still bullish on the livestock industry,” Upshall said. “This is the ideal place to produce pigs.”
