In the last five years the economic pressure on hog producers has varied between mild and intense. There have been only a few months when the average returns for producers have been positive. Of course, there is wide variation in the cost of production among producers but very few have been profitable on the hog portions of their farm businesses. Additionally, the returns in the packing sector have been declining as well.
As a result of that pressure, producers have been searching for solutions. The suggestions have included the following.
- Improve demand for pork, specifically in Ontario, by advertising campaigns that would emphasize local attributes and product quality. This is an appeal to national/provincial loyalty through labeling policies. Some anticipate that this would raise the demand, and therefore the price, by enough to return the industry to profitability.
- Convince governments that society should help hog farmers by subsidies, although we would prefer to call them something other than subsidies. The logic is that as suppliers of food, producers need stability in their returns and that all of society will benefit from that. Generally in Ontario, Quebec is held out as the model for this type of system. Other countries, specifically the EU, have also used this tactic. This would almost certainly be subject to countervailing duties and reduce trade.
- Restrict trade so that Ontario retailers are legally required to buy Ontario product and that cheap imported product from other countries or provinces should be outlawed. This proposal puts a legal twist on the local food story. Generally, economists and trade experts regard this as unachievable as it would significantly impact our existing trading agreements.
All of these, and more, have been tried many times by other segments of economies in many countries and over many years, even centuries. My objective is to discuss how we can learn from those previous experiences and suggest some possible course for the future.
Currency Exchange Rates Matter
For the early part of Canada´s history our exchange rate was fixed. It was tied to the American dollar (US$) which was in turn, tied to gold. The price of gold was $35 per ounce. Some of us (but not many) can remember when the Diefenbaker government, in the early 1960s, "devalued" the Canadian dollar (C$) from about $1.00 US to $0.92 US. The opposition was incensed and it cost Diefenbaker his majority government. It was a point of national pride. The opposition called the currency Diefendollars. From an economic standpoint however, it was probably the right thing to do.
From then until late 2007 the C$ was virtually always less than the US$. We thought that was normal and expected it to always be less. The rapid move in a few years from $0.65 US to par caught the whole Canadian economy by surprise.
The building investments and other capital expenditures made fifteen to twenty five years ago proved to be too high with the dollar at par. We over-capitalized the Canadian hog production segment of the pork industry.
In the long run, exchange rates follow economic productivity. In the last ten years the Canadian economic environment has been improving relative to the United States. The implementation of the GST in the late 1990s and the reduction of the Federal deficit as a percent of GDP set the stage for improving economic performance. Eventually the Federal deficit was turned into a surplus. The surplus persisted until 2009.
Now the Canadian corporate tax rate is lower than the American rate, although the U.S. has many loop-holes. Canada came through the 2008 economic crisis in better shape than most countries in the developed world. American financial writers have noticed. Canadian stocks are being recommended by many stock market newsletters. Financial papers, such as The Wall Street Journal, are noting that Canadian corporate tax rates are lower than American ones and our federal budget and deficit are a much smaller percentage of GDP.
"It wasn´t long ago that Americans viewed Canada as a poorer neighbor with only one competitive advantage—in hockey. No more: On January 1, Ottawa cut the nation´s corporate tax rate to 16.5% from 18%, compared to the U.S. federal rate of 35%.
This isn´t a new trend up north. Canada starting cutting corporate taxes in the 1990s under the Liberal government of Paul Martin and has since enjoyed a virtuous cycle of investment, job creation and growth. The trend has continued under Conservative Prime Minister Stephen Harper, who has pledged to take the rate to 15% by 2012." (Wall Street Journal, January 4, 2011)
We should expect our currency to stay strong relative to the U.S. dollar for some time. This means that very high futures prices of $95-100/cwt will translate into approximately $165 - 175/ckg. In the "good old days" those futures prices would have resulted in record high Canadian prices of $250/ckg.
Culture, Customs and Values Matter
The per capita pork consumption is declining in Canada and in the U.S. The slippage may be greater in Canada where per capita annual consumption is now less than 20 kilograms. Several factors are applying downward pressure. These include:
a) Trends toward vegetarianism for a variety of reasons. Sometimes those reasons are based on nutritional perceptions, sometimes they´re based on environmental interpretations and sometimes they´re just taste and personal preference.
b) Generally accepted medical opinions are that we eat too much red meat. Dr Oz, the latest Oprah protégé, has recommended that "a good way to control your weight is to have meatless lunches".
c) Concerns about animal welfare that specify how animals should be housed and cared for. Sow stalls take the brunt of the criticism but many other animal housing and handling practices are being questioned. There will be more to come.
d) Religious dietary restrictions. As the percentage of Muslims in the Canadian population increases, the per capita pork consumption can be expected to decrease. Some will argue this is offset by a rising percentage of immigrants from Asia, where pork is a preferred meat.
e) Perceived food safety issues with mass production systems. Our society is very risk averse. Any perceived risk will turn some people away.
f) Substitutes will become increasingly common. Tissue culturing of meat is here. Scientists know how to do it but it is not yet cost effective. That part may come sooner that we think. In addition, vegetable based meat replacements are consistently more widely available.
As people involved with food animal production we tend to discount these issues. However, meat/pork is not essential for human health and there is a chance that these social cause based perceptions will become more common. On February 1, 2011 the Oprah show ran an episode called Vegan For A Week. They took their cameras into a Cargill beef plant and the bottom line message was:
"It´s ok to eat meat if you choose to, but limit your consumption (one guest suggested twice a week) and choose meat from ethical small farmers."
Animal welfare is an implied, if not explicit, factor in the arguments against meat. This is an important area for our industry to address. We need an animal welfare marketing campaign to support and supplement the excellent work already being done.
Mahatma Gandhi, the master of social cause based fights, said this: "First they ignore you, then they laugh at you, then they fight you, then you win". It is possible that the reduction of red meat consumption will continue as the beliefs of a few become more widely accepted in North American society.
We need to recognize that more people may question our processes and products and use moral and ethical arguments to justify their positions. We´re still ignoring and laughing.
Access to Markets Matters
Canada is a rich country. We have a small population and a large land area with plentiful resources. We have a good arable land base, a desirable climate for pig production and a plentiful supply of fresh water. We can, and do, produce more pork than we can eat and there are parts of the pig that we don´t want to eat, but other people do. We represent a small portion of global pork production. Canada contains about 1.7% of the world´s pigs and 0.5% of the world´s people. We need to trade in pork products. We should expect our governments to assist with that.
In the past, we have not been aggressive traders and we have not focused our infrastructure on enhancing trade. In her book, ´Why Mexicans Don´t Drink Molson´, Andrea Mandel-Campbell (2007) goes into great detail about the difference between actively pursuing markets abroad and simply taking orders. She makes the point that Canadians have been order takers more than marketers.
One agricultural sector that is acutely aware of the importance of market access is the cotton industry and we can learn from that experience. It has always been dependent on exports, global processes and markets. For a complete history and description of that evolution over the last 200 years, I recommend ´The Travels of a T-Shirt in the Global Economy´ by Pietra Rivoli (2009).
Some think that environmental concerns will reduce trade because of the transportation cost and impact. However, the energy consumed by a T-shirt in its life is reduced by 60% with the consumer choice to use a clothes line instead of a dryer and reduced washer temperature. The energy used per kilogram of pork consumed is heavily weighted towards the home. Global transportation is very efficient and getting better. It is cheaper than ever before in human history.
CHALLENGES AND OPPORTUNITIES AHEAD
Canadian hog producers face a future with a strong currency, shrinking domestic demand and rising global demand. However, the global market place is full of barriers and political whims. The U.S. market is the most accessible for us. It is still the biggest and richest market in the world but is subject to the same negative pressures as the domestic market. Still, it is our major export market and we should not neglect it.
Increasing Global Demand
As global incomes rise more people will eat more meat. This is particularly true in Asia and specifically in China. This represents a big opportunity for a country like Canada. We can produce pork cheaply and efficiently and will be well positioned to increase our global market share.
This year the world population will reach seven billion. Many of those people will be in rising economies, such as China. As their incomes rise, they will want to eat more meat. In most Asian societies, pork is a preferred meat. Also in Asian countries, Canada is well regarded as a reputable supplier with a good handle on technology and food safety. We have not done a good enough job of protecting and enhancing our reputation.
"The World Bank has predicted that by 2030 more than a billion people in developing countries will belong to the "global middle class", up from just 400 million in 2005." (Kunzig, 2007)
What will it take for Canada to capture a desirable share of the increasing global market? It will take trade and innovation. We need to do a better job of both.
It is likely that the global demand for pork will grow in the next 20 years, but it is possible, maybe even probable, that the North American pork demand will continue to decline. That is definitely a challenging situation and it demands more trade expertise.
Canadians usually think of themselves as being less competitive than the U.S. We have long pictured ourselves as being incapable of producing as cheaply as the Americans. This is not the case, particularly on the farm side. Since mid-year 2010, the corn price in Ontario has been lower than in Iowa and it has consistently been lower than in North Carolina.
The packing side is a different story. American plants generate more revenue per hog and have lower plant operating costs. Contrary to popular producer opinion, the hog procurement cost is similar in both countries. We need to actively work to reduce packing plant costs in Canada. It will take actions by individual firms, governments and industry organizations to make it happen. Building a more competitive packing sector is a challenge for our industry.
In 1900 Wilfred Laurier predicted that "this will be Canada´s century". While we did well in the 1900s we didn´t perform as Laurier had anticipated. We also didn´t do what he said was necessary for the dream to be realized. Among his prerequisites were limited government size with light taxes and fiscal discipline. Additionally he was a strong promoter of free trade with the Americans. We haven´t, until recently, done very well on these issues. As mentioned though, we´re improving. ´The Canadian Century´ by Brian Lee Crowley et al. (2010) provides an excellent summary of why the Canadian economy is currently the most stable of the G7 group
Many times in the last twenty years we´ve heard advisors and consultants tell us that we can´t compete with the U.S. in commodity product and that we must differentiate ourselves in the markets. While most of us are in favor of differentiation, and the dream of having consumers ask for Canadian product brings warm feelings in our hearts, it is not likely to happen very often.
I don´t buy into the idea that we can´t compete. There´s no fundamental difference between Southern Ontario and Michigan or Ohio. Too often we´re swayed by the widely circulated and loudest opinions and fail to look at the facts.
The Canadian hog and pork sectors have been guilty of thinking in narrow silos, concerned about their own businesses or segments at the expense of the entire supply chain. There are opportunities in working together and coordinating efforts. One example of this is carcass weights. It´s pretty clear that both farmers and packers profit from heavier hogs and in the last 40 years we´ve moved from selling 200 pound pigs to 275 pound pigs. With each increase we´ve heard complaints that the packers were disregarding the interests of farmers and/or consumers for their own benefit. With each increase we have dragged slowly and reluctantly behind the Americans. We could have been leading in this area.
A major contributor to competitive production is technological development. Sometimes we hear people say that we´ve become as efficient as we can possibly be. This is never true. Look at the technological advances in hog production in the last 50 years. Sow productivity, feed efficiency and carcass quality have all improved dramatically.
Think about corn yields over the last 50 years. Many Ontario farmers now expect 200 bushels per acre and it´s possible that we´ll soon see 300 bushels. For a description of the impact of agricultural technology on our society see ´The Rational Optimist´ by Matt Ridley (2010).
The challenge is to build our industry. Be big enough to be competitive, but nimble enough to be special.
The hog and pork businesses are becoming increasingly competitive but Canada is well positioned to maintain its position in the global market place. We must become competitive with our dollar at par with the U.S. dollar. That´s a bigger challenge for meat packers than for hog farmers but both must improve.
The actions we take can determine whether the industry prospers or dwindles. There is no certainty that hog production and processing can continue to be a significant portion of Canadian agriculture. The prominence of hogs and pork in Canadian agriculture and the global positioning of Canadian pork, depends on us. It depends on our ability to produce our pork products competitively and market them effectively in international markets. It´s hard work with no guarantees of success.
Ontario and Canada need to foster a spirit of innovation and creativity in order to gain and maintain global market share. A small percentage gain in global market share is a major increase in Canadian production.
Technological advances will continue to pressure and assist the economy. This will apply to both the technologies of our own production and those of alternative sectors. Meat substitutes will be increasingly available at declining prices as the technologies improve.
Crowley, Brian Lee; Clemens, Jason; Veldhuis, Niels. The Canadian Century. 2010. Key Porter Books Limited. pp 72-84.
Kunzig, Robert. January 2011. Population Seven Billion. National Geographic. pp 42-63.
Mandel-Campbell, Andrea. 2007. Why Mexicans Don´t Drink Molson. Douglas & McIntyre Ltd. pp 24-37.
Ridley, Matt. 2010. The Rational Optimist. HarperCollins Publishers. pp 135-156.
Rivoli, Pietra. 2009. The Travels Of A T-Shirt In The Global Economy. John Wiley & Sons Inc. pp 3-73.
Wall Street Journal, January 4, 2011. Editorial, "Canada´s Competitive Edge". http://online.wsj.com/article/SB10001424052748703909904576051792262197206.html# articleTabs%3Darticle
This paper was presented at the London Swine Conference - Exploring the Future March 30 and March 31, 2011. Engormix.com thanks for this huge contribution.