Although Canadian swine rearing's profitability continues to improve, both market forces and overhangs from yesteryear limit farmers' incentive to expand inventories.

 

With Canadian hog prices falling in the second half of 2013, profit margins peaked near US$3/head in the third quarter but fell by over 50% in the fourth quarter.

 

As approximately 66% of output is exported, and 32.4% of these exports go to the United States, the two countries share a singular, integrated pork market. With North American swine priced in US dollars and the Canadian dollar falling from US$1.00 to US$0.94, America's 14% decline in hog prices turned into a 7.5% decline in Canadian dollar terms. That helped keep Canadian hog rearing margins from dipping into the red.

 

Nevertheless, with Canadian feed costs higher and profit margins lower than south of the border, PEDv's crossing into Canada looming before them, and a debt over hang from overexpansion in the late 2000s, many Canadian hog farms are financially strapped. Most chose to put any windfall profits into paying down debts accumulated during capacity overexpansion several years back than use the funds to expand herds.

 

After three years of static, nearly unchanging numbers, Statistics Canada s pegged Canada's national hog inventory at 12.75 million head as of early March, up 1.1% from the same time in 2013. Even though the financial reluctance of Canadian farmers to boost herds is well documented, this was even below conservative expectations. The USDA, for example, had expected Canada to enter 2014 with at least 12.9 million hogs.

 

Strangely, Statistics Canada data also put the Canada's sow inventory at 1.192 million head, or 1.9% higher than was estimated by the USDA, which had expected the number of sows to fall rather than rise. With sow numbers gradually increasing and replenishment having declined for several years, Canadian sow productivity has been slowly falling since 2011, and looks set to continue doing so this year. The anomalous nature of this trend has led the USDA to recently question the accuracy of Canada's hog reporting statistics.

What is certain is that despite the widespread reluctance to expand  herds and lower hog prices in late 2013, last year hog price inflation and lower feed costs gave farmers with the capital to expand their herds some of their best returns in many years.

 

Going forward however, the rising incentive to expand production and take advantage of 2014's high hog prices is counterbalanced by higher than expected swine mortality, as PEDv crossed the US border and has been detected at hog farms in the Canadian provinces of Manitoba and Ontario. Hence, we can expect Canadian hog inventories and pork production to remain flat, with higher finishing weights offsetting a nominal, 0.1% decline in slaughter numbers. With 2014 output at 1.82 million tonnes, though unchanged from 2013, remains 1.1% below the all-time high set in 2012.

 

Along with pork exports totaling 17.4% of the world market, Canada is also an important supplier of live hogs to American integrators, though this part of the trade has been diminishing in recent years. After rising from 4.36 million hogs in 2000 to a peak of 10 million in 2007, America introduced Country of Origin Labelling (COOL) requirements for pork in 2008. As a result of the COOL laws, live hog exports have fallen every year since, to 4.98 million in 2013.

 

Moreover, new more stringent COOL regulations came into effect in November 2013. They had the effect of making live hog exports fall below their initial USDA forecast of 5.15 million head to just 4.98 million. They will probably also depress 2014's live hog export total below the USDA's 4.92 million forecast, and into the 4.0 to 4.5 million head range.

 

The chill was immediately felt in the industry. For example, due to the cost and logistical complexity of complying with the stricter COOL regulations recently introduced, Tyson Foods opted to stop buying pork and cattle from Canadian feedlots north of the border because of the higher cost of complying with the new, stricter labelling laws.

 

Due to its depressing impact on hog inventories and investment, the Canadian Pork Council estimates that COOL's accumulated damage to Canada's swine sector amounted to around US$2.5 billion by the end of 2013, with the amount growing every year.

 

Fortunately, when combined with PEDv-induced pork shortages south of the border, the COOL laws resulted in fewer live hogs being exported but more pork itself, as 2013 shipments to the US climbed by 12% over the previous year's total. At 404,000 tonnes, this volume remains below the peaks of 420,000 and 474,000 tonnes exported to the US in 2004 and 2005, when the Canadian dollar was 30% cheaper than it is today.

 

Fortunately, Canadian pork exports diversified since that time. Such that, since 2005, America's share of Canadian exports has fallen from 70% in 2000 to 32%, with 2014 volumes 17.5% lower than their 2005 peak. On the other hand, with exports to Japan, China, Russia and Mexico increasing anywhere from 100% to several thousand percent since 2000, their combined share of Canadian pork exports went from 24.9% of exports in 2005 to 46.4% of exports today.

 

In these markets, recovering hog production in Japan and South Korea is resulting in 2013 exports being 14% and 51% below their 2012 peaks. Fortunately, that was offset by a 70% rise in exports to both China and Mexico, a tripling of exports to Chile and Columbia, and America's own PEDv-heightened demand for Canadian pork.

 

With Canadian pork production staying flat and consumption falling a nominal 1% that leaves just enough pork to keep exports constant at 1.245 million tonnes for a second consecutive year. It comes with inventories falling to 45,000 tonnes, which is near their average level for the last fifteen years. 

 

Given the lack of investment in new capacity and the possibility of PEDv outbreaks impacting hog numbers later this year, Canada's pork market story resembles that of its main rival, the United States. Just like the number one pork exporter, ten years of fast rising exports ended in 2012, and its contribution to a pork hungry world market looks set to stay in the 1.2 to 1.3 million tonne range through the end of 2015.