A CPC Backgrounder on Hog Returns
The attached chart of inflation-adjusted Ontario hog prices clearly illustrates how drastically farmer returns have slid. While the historical trend is for declining >real= prices for hogs, the greater than 60% decline in just the past few months to a level which is now just a bit over half of the previous historical low, has created greater economic that anything seen before by pork producers.
The price information presented here below covers the year-to-year change and also looks forward into the short- to medium-term future. All of this is intended to help us better focus on the current critical issue of enabling Canada=s pork producers to survive the current market collapse and to still be in business in the few months from now when indications are for prices to return to more normal levels.
The Shorter Term: A Year Ago, the Present, and Indications for the Year Coming Up
I. Past The weighted average price for the week ending November 21st, 1997 (i.e., one year ago), in Quebec was $191.24 for 100 kilograms (carcass weight basis, index 100).
II. Present This year, for the same week (the one ending November 20th) the pooled hog price in Quebec was $70.76 for 100 kilograms (carcass weight basis, index 100).
III. Future The best known indicator of what direction hog market returns are expected to follow over the next several months is the series of prices established daily at the Chicago Mercantile Exchange of what speculators are willing to pay for the opportunity to purchase hogs that are delivered in future months. A few selected dates are presented below from the closing prices on Wednesday, November 18th, 1998 for Lean Hogs.
The prices are reported in U.S. dollars for 100 pounds of a lean carcass. We have converted the figures into Canadian dollars per 100 kilograms carcass weight basis.
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For delivery in: December, 1998 February, 1999 April, 1999 June, 1999 July, 1999 |
$ Canadian per 100 kg $ 94.55 $120.44 $133.23 $165.05 |
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The Historical Hog Price Trend
Agricultural product prices, certainly those which occur in open, unregulated markets, have been declining ever since such prices have been recorded. This is as a result of major improvements in productivity and efficiency, perhaps greater than has occurred in any other segment of Canada=s economy. It is the reason why, as the chart below points out, hog farmers have been getting along in the 1990's, even before the current downturn, that are well under half what they were in the late 1970's when one adjusts for inflation.
In the case of the hog industry, these productivity improvements come about as a result of: breeding programs that lead to faster growing animals; larger and more specialized farms that can take advantage of computerized feeding and environmental maintenance equipment; and better disease control made available by improvements in housing (e.g., better ventilation), just to cite a few examples.
It has been a major success story, and an increasing amount of the research and technology transfer that is required to facilitate this productivity improvement is financed by the farmers themselves. The investment required to take advantage of technological innovations has also been growing rapidly over time. It goes to say that as producers= losses remain so large relative to anything before experienced, which the graph below clearly shows, these investments simply cannot be sustained. Furthermore, many of the recent major investments made to meet the future growth in international consumption of pork meat, could be lost in the event of bankruptcies.
Should this occur, what has been the very favourable long-run experience of both growth in pork production in Canada (we are now exporting more than 40% of our production S half of that to the U.S. and the rest to offshore markets), and declining prices to consumers for pork and pork products, would also cease.
This is the driving force behind the efforts by the pork producers and their organizations to explain the current situation, to provide the background information that should maintain confidence in the long-term for pork production in Canada, and to initiate actions by all of these players to make it through this temporary, but intensely difficult, crisis.
November 1998
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