There are hurdles to jump and hills to climb, but the hog industry now has three options for a Made-in-Canada price.
Catherine Brodeur, Vice President Economic Studies with Groupe Ageco, released results of a study to producers at the Saskatchewan Pork Industry Symposium on Nov. 13 in Saskatoon.
Brodeur, the project leader, said the subject of livestock pricing in Canada is sensitive, so the study had to be bullet proof.
The study touched a lot of bases:
· Interviewing buyers of Canadian and American pork all around the world in Canada’s main export markets;
· Interviews with different stakeholders;
· Multiple interviews — at least eight — in Canadian and American pork export markets. The countries where these took place were Japan China, Mexico and the U.S.
Japan was the only market where there is a premium paid for Canadian pork, in comparison to American sales, the study found.
The study was complicated by, among other things, the differences between Eastern and Western provinces.
These included:
- Production systems, supply chain structures, market regulations;
- Share of live pigs exported to the U.S.;
- Share of pork supply exported to Japan;
- Market access costs (transportation);
- Level of competitiveness between packers.
It was important for researchers to propose a price model that:
· Used reference prices that best reflect the market conditions for North American hogs. This was based on the U.S. market reference, acknowledging the loss or representatives of some U.S. hog reference prices and the higher relevance/increasing use of a cut-out reference in price formulas;
· Captured and shared the higher value of Canadian pork meat documented in some markets, namely Japan;
· Recognized a premium for the cost of producing ractopamine-free pork.
There were a number of obstacles to setting up a Canadian cut-out:
· Low number of meat packers would make it difficult to comply with confidentiality rules, and the risk that data could frequently not be published;
· Interest for a specific cut-out price would account for the apparent premium on some export markets (Japan). Sales on this market would not pass the confidentiality test, leaving the cut-out value without its most worthy piece of information.
An analysis of the United States reference price was also required:
· Swine negotiated price alone does not provide relevant market information about the value of U.S. live hogs; the cut-out value provides market information for two thirds of the U.S. swine production.
When researchers put all the ingredients into a bowl and stirred it up, three options emerged. The options have a U.S. cut-out reference alone or in a combination with a live hog reference.
Option 1: Based on cut-out preference;
Option 2: Based on a combination of live hogs and cut-out reference;
Option 3: Based on a live hog reference with a cut-out window.
Brodeur explained each one.
Option 1
“The question here is the extent for which the packers and producers will share the value of the cut-out, because the cut-out in the gross margin has to take into account the other costs of the packers, so it is not 100 per cent of the cut-out. Ninety-five was used in the calculation, but this will have to be debated, of course.”
Option 2
“This is based on a combination of a live hog and a cut-out reference or the weighted average of two reference prices: a live hog price reference and a pork cut-out price reference.”
“The question is what weight to put on each of those components. We put 18 per cent and 82 per cent. Why? Because 18 per cent of Canadian hogs are exported live to the U.S. It is arbitrary. There is no economy argument or logic to say this percentage should be higher or lower.”
Option 3
“This is based on a live hog reference with a cut-out window — a floor and a ceiling percentage of the cut-out to avoid the upswing or downswing of the cut-out related to the live hog price. So, we put 90 per cent and 100 per cent as our boundaries.”
The options were tested with data from 2013 to 2019.
“The result is not surprising — improved reference prices for Canadian hog producers in all three options. With our three options, we have a larger share of the pork cut-out value that is being distributed to producers.
“In all three options the volatility of hog prices is reduced, something that is positive. If we look at Option 3, the price spread between the pork cut-out and the live hog prices reference more closely follows the spread variation when live hogs and the cut-out price are aligned in the U.S. and contains the upswing of the spread. It is what we want with this formula: The volatility of the spread is significantly reduced.
“In conclusion, a Made-in-Canada hog price reference model (was developed), instead of a hog price formula. We suggest one is based on relevant best-market preference: That is a cut-out reference. It can be alone or in combination with other references, capturing and sharing a higher value of Canadian pork meat in the Japanese market.”
There are going to be challenges moving forward, according to in study results.
“The best formula with the best arguments does not answer the question of its implementation in the Canadian hog sector.
“Without leverage, regulatory or other measures to improve the balance of power, it will probably be difficult to force packers and producers to adopt such a formula.
“It is hard to imagine that packers will voluntarily adopt a formula that will result in reduced margins for them. There is a need to demonstrate that it is in their interest to do so.
“Several efforts have been made to date to demonstrate that it is the common interest of the sector to have a profitable production sector capable of investing in the future.” •
— By Cam Hutchinson
