The U.S. industry has seen processors buy out producers and raise their own supply, eliminating a cash market price
CALGARY — Pricing Canadian pigs based on the United States cash market is “a brain dead formula” that no longer serves producers, says the president of Alberta Pork.
Frank Novak told producers at the organization’s Nov. 9 annual general meeting that the low number of pigs traded on the U.S. cash market don’t provide an accurate reflection of value, and the system must change if Canadian producers are to continue finishing pigs in Canada.
“Our problem right now is not a protein problem. We don’t have a problem selling pork. What we have is a problem with the cash market price.… It tells us our market is broken.”
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Novak said about 3.5 million pigs now trade on the U.S. cash market, a fraction of the millions produced, and that number will shrink in coming years as new American processing plants come on stream.
Most of those have producer investment, said Novak, so fewer pigs will trade on the cash market.
“They down there believe that in five years there will be no cash market. I implore you guys to get your heads out of the sand, if they’re in there, and start pushing to do something different. I just hate to see us get left behind.”
Vertical integration is taking place in the American industry but that isn’t happening here, said Novak.
Processors have managed market challenges by buying out producers and raising their own supply, but that won’t be an option much longer.
About 47 percent of Alberta hogs are raised on Hutterite colonies, and they are unlikely to sell operations to processors.
Canadian processors need pigs, said Novak, but they also need to devise a better deal with producers to ensure supply.
“We need those plants to be full. We need them to be profitable. But I would much rather they be profitable along with me than despite me,” he told producers.
In a later interview, he said most producers don’t have the money to invest in processing plants so another approach is needed.
“My recommendation is that the producers and the processors need to get together and figure out a way to operate as if the producers had invested in the processing facility,” he said.
But is processor buy-in likely?
“There’s a flaw in every plan,” he said, with a wry smile.
“It’s only a flaw until you fix it. Either the processors agree that this is the problem and there’s one way to fix it, or they don’t. And if they don’t, if I turn out to be right, then eventually they’ll figure out that they should have.”
Brett Stuart, founding partner of Global AgriTrends, agreed there will be fewer U.S. cash-traded hogs in the future. By 2018, he said the U.S. will have slaughter capacity of 46,500 head daily.
Only 2.5 percent of American hogs trade on the cash market now, he said, and that will shrink when new processing capacity comes on line.
As well, American producers are erecting new hog barns, 150 of them in Iowa alone, and to get supply, these new plants will need contracts. Those will come at the expense of cash trades.
That extra barn capacity might also prompt Canadian producers to ship piglets to the U.S. rather than finish animals here.
“The larger producers will find it easier to ship to the U.S. because they have the volume. The colonies and the integrated guys can hang on longer than anybody but they too will get tired of it,” said Novak.
“And all the independents who aren’t quite big enough to make it easy to export will suffer the most first, which is exactly backwards in my estimation.”
Alberta Pork executive director Darcy Fitzgerald said producers now are losing $40 to $50 per finished pig.
