While some producers in Europe have seen profits this year, for many of the world’s producers, 2009 has been very hard on balance sheets. As a result, the industry is restructuring in key parts of the globe. The hard to find silver lining is that industry experts expect profitability to return sometime in 2010. What will allow this to occur are several key factors: a return of demand and opening of export channels as consumers finally realize that they cannot get H1N1 from pork; the expected gradual recovery of the global economy, which will stimulate pork demand; and action by producers to reduce pig supplies to match market demand.
Producers have been particularly hurting in North America. Faced by huge losses and the chance that huge numbers of producers would go out of business, the Canadian government recently announced three key programs aimed to provide immediate help to producers. The first program will address the liquidity crisis by providing loans to those businesses that still have an opportunity to survive. The second program will help those who need to exit the business through an orderly transition program.
“The impact of the world pandemic caused by the H1N1 virus has delayed the prospects for price recovery in hog markets. This is the latest blow to an industry that has faced serious challenges over the past few years, including high feed costs, high exchange rates and U.S. public policies,” says Jurgen Preugschas, Chair of the Canadian Pork Council (CPC). “The industry has responded through dramatic restructuring and a commitment to a Strategic Transition Plan,” he says.
The International Pork Marketing Fund, the third program, will build a strong foundation for the future of the industry by helping to drive demand for Canadian hog and pork products with Canada’s international trading partners, Preugschas states.
Canada’s pork producer neighbors to the south take a dim view of the program, however. The emergency government subsidy program for the Canadian pork industry proposed by the Canadian Pork Council would have a “lethal impact” on U.S. pork producers, according to the National Pork Producers Council (NPPC). NPPC claims the Canadian plan would pump $800 million into the country’s pork industry. The key component would be the loan—to be repaid over 10 to 15 years—of $30 for each market hog. The second component would provide $500 for each sow culled plus the market value of the animal. The proposal would artificially prop up Canadian pork production and, according to Iowa State University economist Dermot Hayes, U.S. live hog prices would be approximately 7% lower than otherwise would have been the case.
“NPPC is extremely concerned about such a program, which will shift financial plan to U.S. producers, who already have lost an average of more than $21 per hog since October 2007,” says NPPC president Don Butler. He says that while the program is described as a “loan,” it is unlikely that commercial banks would make unsecured, subordinate loans to Canadian pork producers at a time when they are losing money. “The program is really a cash bailout,” he claims.
In response, the CPC says that the Canadian hog industry has and continues to adjust to market signals. The organization says that NPPC’s suggestion that Canadian actions will negatively affect U.S. prices is galling.
Impact of COOL
“On the contrary, Canadian pig pries have been in large part artificially depressed by such things as the U.S. Country of Origin (COOL) rules, says Preugschas. “Many former U.S. customers for Canadian pigs and pork have ceased purchasing our products due to the burden COOL has created for food handlers in the United States. Live hog exports from Canada to the United States, since COOL became mandatory, have declined sharply. Fully 36% fewer hogs have been exported to the United States this year compared to last.” According to the CPC, the Canadian sow herd has declined 6% this year compared to last and nearly 12% since 2007. The U.S. breeding herd has decreased by less than 4% over these past two years, or only a third experienced in Canada, CPC states.
On the U.S. side, the U.S. Department of Agriculture announced plans in early September to aid pork producers by agreeing to purchase $30 million of pork products, which will be used for various federal food programs. USDA also is working to reopen pork export markets that closed in the wake of the H1N1 flu outbreak.
“The action by USDA to buy additional pork will benefit America’s pork producers, the U.S. economy and people who benefit from government food programs,” says Butler. “The pork purchase and the ongoing efforts to reopen export markets are important steps that will help our industry bring pork supply and demand back into balance. NPPC has asked the government to purchase $50 million of pork for various federal food programs. The organization also asked for a variety of other assistance, including using $100 million of the $1 billion appropriated for addressing the H1N1 virus for the swine industry. This would include $70 million for swine disease surveillance, $10 million for diagnostics and H1N1 vaccine development and $20 million for industry support.