Narrow margins are new reality of the pork industry

Canadian pork producers need to come to terms with the new economic realities of the pork industry, say two industry experts looking at the business from different perspectives.

Forget all the old beacons which have guided the pork industry for years, says John LaClare, general manager of production with Big Sky Farms Inc., a major Prairie hog producer based in Humboldt, Sask. "We've all seen good and bad times, but experience hasn't prepared us for today's realities," he told farmers attending the annual Banff Pork Seminar.

To survive in an industry of ever-narrowing profit margins, producers need to put much more emphasis on financial management, says Rick Andersen, a native Albertan, now a Senior Vice President with Sparks Companies Inc., in Memphis, Tenn. "The good times are gone as far as making easy money. Even in the old days of market swings there was money to be made on the low end. But not any more."

LaClare says many long-time hog industry truths were valid just two years ago. He pointed to a predictable four year price cycle; confidence in producing top quality, safe products; access to a growing international market; an abundant low-cost feed supply; a well-funded research base; a large land base for industry expansion; excess slaughter capacity that is good for producer pricing; and a large labour pool.

"But now we face a host of new challenges," he says. Average pork prices have dropped so much that producers cannot benefit from production efficiencies; the BSE issue has increased beef supplies in Canada - affecting pork marketing and it has also taken some polish off Canada's "purity" reputation; slaughter capacity is in a bind as most plants are only running one shift, and there isn't the hog supply to run two; the rising Canadian dollar reduces the value of each market hog by $15 to $30 per head; COOL (Country of Origin Labelling) in the U.S. threatens to reduce Canadian pork exports; and pork's share of the consumer dollar is decreasing.

Despite the negatives LaClare says the industry will survive. "We have to meet the challenge by differentiating our product from the rest," he says. "We have to produce high quality pork by building on our quality assurance program. Hopefully, traceability technology will help us leverage better prices and expand markets."

LaClare says producers need a mindset for strategies that reduce losses rather than increase profits. "We need to find ways to save pennies per head and learn to live with smaller margins," he says.

Agreeing that margins will remain narrow, Andersen says producers need to use financial management tools to lock in the best prices possible. "Producers need to be looking at pricing at least part of their production six, 12 and 18 months down the road," he says. "Watch for market signals and take action. In 1998/99, another low point in the markets, producers had a chance to lock in $15 to $18 per head profit margins, yet many didn't and lost $40 per head. They missed their chances."

Producers also need to search out packer contracts, and take advantage of other risk management activities, says Andersen. "In the U.S. we're seeing more co-operative ventures getting producers involved in the packing industry," he says. "Not every idea will work for every producer, but each has to look at all the options and do more than pay lip service to risk management. If producers don't use the tools out there, their business survival is at stake."

The Banff Pork Seminar is co-ordinated by the Department of Agricultural, Food and Nutritional Sciences, University of Alberta, in co-operation with Alberta Pork, Alberta Agriculture, Food and Rural Development and other pork industry representatives. This year's seminar played host to more than 700 delegates from throughout North American and Europe.

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