The next decade will bring greater stability for most hog producers.
But a smaller group – those who sell outside of long-term contracts or alliances with processors – can expect more price volatility.
On average, Canadian hog producers will achieve average prices of $150 to $155 per hog over the next 10 years, said Bill Oakley, vice-president of Maple Leaf Pork.
Long-term average hog prices ranged from $45 to $50 (U.S.) per live hundredweight during the past 30 years, Oakley told last week’s GrainWorld conference.
But he expects the long-term averages of the future to be lower.
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That’s because hog operations are becoming more productive, with greater rates of daily gain, higher feed efficiency and lower death rates.
Oakley made his prediction after describing how technology is rapidly changing the pork industry.
“What we did in the last 10 years will be nowhere sufficient to ensure we survive in the next two years,” said Oakley.
Large plants are helping processors find new economies of scale, he said. They are taking a page from the cattle industry.
Today, about 65,000 head of cattle per week go to four plants in Western Canada, said Oakley. Two of the plants handle more than 90 percent of the production.
It’s a big change from the 1980s, when 17 plants handled 50,000 head per week, he said.
Today, nine pork processing plants handle about 140,000 hogs per week in Western Canada.
But in seven years, Oakley thinks five or six plants may handle an increased Western Canadian slaughter of 200,000 head per week.
“Out of the plants that currently exist, I would expect half would have a very, very hard time surviving.”
In the United States, the four largest processors handled almost 60 percent of the hogs.
In Canada, Oakley estimates the top four processors will control more than 68 percent of the slaughter this year, up from 51 percent seven years ago.
The retail sector is also concentrating. By 2002, the top 10 U.S. food retailers will control half the market. And by 2004, the top three Canadian retailers may control 70 percent of the market.
Producers are also seeking economies of scale, Oakley said.
In 1999, the 15 largest U.S. hog producers accounted for 40 percent of production. In Canada, the top 10 producers account for 30 percent of production, Oakley said.
“Farms are getting larger because of a cost reason,” he explained.
Oakley projects U.S. producers will grow their hog supplies by a mere one percent by 2004.
But in Western Canada, hog production is expected to grow by seven percent per year. By 2004, Oakley expects hog production west of Ontario to reach 13 million head, up from 10 million in 2000.
Finding capital to build barns is one of the main constraints for the projected growth. Lenders now prefer proposed operations have 35 to 40 percent equity. For a 3,000-sow barn, that can mean raising $16 million, said Oakley.
“That’s a lot of capital, a lot of cash, a lot of equity for these groups to get together,” he said.
But long-term direct contracts, alliances, and arrangements offering producers their cost of production, plus a guaranteed return, may lend stability to operations and peace of mind to bankers.
Oakley said lenders may be willing to drop their requirements as low as 20 percent if price volatility is reduced.
Maple Leaf will soon announce a risk-sharing mechanism for its contracts, he said.
But Oakley expects the hog price cycle to continue, with four years between peak prices.
