April 27, 2016
Canada's swine market cycle finally turns upwards
By ERIC J. BROOKS
An eFeedLink Hot Topic
- America's December 2015 repealing of COOL laws gives the industry an important, long term boost
- COOL's repeal will boost live hog exports and inventories first, followed by rising pork shipments to the US
- Aggressive growth in shipments to America and East Asia counterbalanced the loss of 113,000 tonnes of exports to Russia, making for a 1% export gain
- The loss of Russia's market hides 10.5% rise in pork exports to all other countries
- Imports are down, with the US losing a small piece of its 90%+ share to EU imports
After years of decline and watching its southern neighbor overtake it as the world's largest pork exporter, the market cycle is finally turning upwards for Canada's swine sector. The improvement in Canadian pork's fundamentals can be seen in its profitability relative to its closest competitor. After tracking the US market closely for most of the last two years, 2015 Canadian hog rearing returns averaged C$6.00/head (US$4.00/head), versus a loss of US$1.00/head in the US. The difference widened during the fourth quarter swine market crash, which saw US producers closing out the year with a US$12/head loss margin, while Canadian hog farmers made C$4/head (US$3/head) during the fourth quarter.
In market cycles, those that fall first rise more quickly too. In Canada's case, after a long swine market depression, a combination of macroeconomic, supply and demand side factors are finally turning in its favour. With 40% of pork exports going to the US, a three year, 25% fall in the Canadian dollar's value against the US dollar partly restored competitiveness lost by a 60% appreciation of Canada's currency in the years from 2003 to 2012.
Having lobbied for its abolition for years, the industry is getting a significant long term stimulus from America's repealing of Country of Origin Labelling (COOL) in December 2015. It was forced to do so by the WTO, which ruled COOL legislation unlawful and gave Canada and Mexico permission to impose countervailing duties if it was not repealed.
For seven years, COOL laws forced retailers to identify Canadian pork as not being of US origin in American supermarkets. This made consumers turn their noses away from imported Canadian pork and even pork harvested from hogs that Canada exported to America for feeding.
Over the short term, the repealing of COOL laws is already stimulating exports of feeder hogs to the United States. Prior to COOL's implementation, Canada had taken advantage of NAFTA's trade liberalization to boost live hog exports to America by 1,192%. They rose from 892 head in 1993, the year before NAFTA was implemented to 4,600 head in 2000 and 10,032 head by 2007.Because COOL's implementation coincided with a sharp rise in the Canadian dollar's value, the Canadian dollar earnings of live hog exports were as badly impacted as the shipment volumes. By 2013, live hog exports had fallen back to 4,784 head, and were 52% below their 2007 peak.
In response to COOL's abolition, the USDA immediately revised Canadian live hog export estimates: Instead of declining 12.5% to 5.05 million head, 2016 live hog exports to America are now expected to rise 7.8%, to 6.225 million head. With the export outlook changing faster than farmers can adjust their herds, 2016 closing inventories have been adjusted downward from the initial 13.6 million head projection to 13.3 million head, virtually unchanged from 2015's 13.25 million level.
Even before COOL was repealed, the Canadian dollar's post 2014 weakening had boosted live hog exports 20.7% over two years from their 2013 lows. On the strength of stronger live hog exports, sow numbers, which had stayed flat or fallen for many years, are preparing for a long term recovery.
From their peak slightly over 1.5 million head in the years 2005 to 2007 inclusive, opening sow inventories crashed 22% to below 1.2 million in 2011. After staying at that level for five years, 2016 saw opening sow inventories up 1.7%, totaling over 1.2 million head for the first time since early 2010.
Most of the increase in live hog exports will come from Saskatchewan, Ontario and Quebec. The closure of hog processing plants in these provinces has reduced national slaughtering capacity. Ontario, which holds 40% of Canada's population, has seen its annual hog slaughtering capacity fall by 1.75 million head over the last three years. Unless closed plants reopen, when inventories rise, this reduction in processing capability could, in some cases make exporting live hogs to the US as much a necessity as an opportunity.
On the whole, with hog numbers staying steady for the better part of a decade, so has pork production, which stayed within 50,000 tonnes of 1.8 million tonnes in the years from 2010 through 2014. Last year, driven by consumers substituting pork in place of more expensive beef, domestic consumption exceeded the USDA's initial 7% forecasted increasing, jumping a strong 11.1%. Part of this was an offset of a 5.6% fall in pork consumption over the previous two years, when PEDv had pushed up its price relative to chicken and pork.
With 65% of Canada's pork output shipped overseas, the 88,000 rise in domestic consumption coincided with a 1.3%, 18,000 tonne rise in exports. With total demand going up 106,000 tonnes, production finally rose a strong 4.7% to 189 million tonnes, thereby breaking out of the 1.78 to 1.85 million tonne range that it had been stuck in since 2005.
With hog numbers yet to rise, rising demand is being partly met from inventories. Instead of rising from 76,000 tonnes at the start of 2015 to 80,000 tonnes, they opened 2016 at 70,000 tonnes will fall 57%, to 40,000 tonnes by the close of this year. These tightening supply fundamentals should keep Canadian hog prices and returns higher than those of their US counterparts, which are currently hitting a cyclical market bottom.
Even the 1.3%, 16,000 tonne rise in 2015 exports was actually more impressive than this nominal increase implies: Russia's economic boycott of western meat reduced Canada's pork exports to that country by 113,661 tonnes, a sum equal to 9.3% of 2014's shipments.
Leveraging a falling Canadian dollar against America's rising greenback, Canada managed to boost non-Russian pork exports by a whopping 10.4% 129,446 tonnes, to 1,235,000 tonnes. Although the US still absorbs 40% of pork exports, with shipments to America rising 10.2% to 491,468 tonnes, Japan 10.8% to 252,566 tonnes, China 13.2% to 114,982 tonnes, Mexico 26.9% to 101,674 tonnes, export growth was well balanced across a diversified roster of importing countries.
With America supplying a huge majority of pork imports, the rising US dollar has kept them near 215,000 tonnes, 10% below their 2012 high for a second straight year. However, just as America lost market share to EU exports in East Asia, this also occurred in the Canadian market. From supplying 95%+ of Canadian pork imports after 2010, the US market share slipped to 90%, with Germany taking a 2% share, followed by 1% shares for Denmark and Poland.
Going forward, although 2016 pig production is rising 3.6%, with live hog exports rising so strongly, the 1 million rise in piglet replenishment will lead to a mere 80,000 head, 0.4% increase in inventories. Hence, COOL's abolishment boosts live animal exports, but postpones Canada's ability to boost higher value-added pork meat exports over the short term.
With Canada's dollar staying below US$0.80 amid growing pork demand in both East Asia and the NAFTA region, exports will rise another 1.3% this year, matching or exceeding their 1.25 million peak volume set in 2012.
But such short-term considerations can obscure the larger story: After a ten year secular decline, long term fundamentals imply that everything from hog inventories to exports are in for a sustained period of long term increase. Canada will not recapture its former number one world pork exporter that it lost a decade ago any time soon. It does mean however, that over the next five years, it is well poised to solidify its number two world market position with export growth evenly balanced between East Asia and its NAFTA trading partners.
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