Hog sector still pushing for a price revamp

Alberta Farmer Express | 11/16/20


They're talking, but there's been no deal between pork processors and producers looking for a better deal on hog prices.

The four western Canadian pork producer group boards have met with the big three packers — Olymel, Donald's Fine Foods and Maple Leaf Foods — to discuss pricing.

"We met with them just under the premise of having a discussion," Alberta Pork's Darcy Fitzgerald said. "It wasn't to point fingers… just to sit down and look at our industry and talk about how we might go forward. Where are the issues?" Pork prices have soared during the pandemic but the price of hogs has fallen. It's in the interest of packers to ensure producers are profitable, said Andrew Dickson, general manager of the Manitoba Pork Council.

"We've got people who need to get $195 (a hog) in order to break even or even get a return on their investment, and we've got others who can survive on $165 to $170," said Dickson. "But the challenge we've got is the cost for replacement of buildings continue to climb — we're looking at over $600 a finisher place.

"And if we want expansion, then we've got to figure out a return to the producer in raising the pigs."

Cut-out value The pork boards have advocated for pricing formulas that lend more weight to the cut-out value.

Some futures options have been introduced based on cut-out value, Dickson noted.

"We're hoping that will spark some interest amongst the packers to look at some additional formulas they could use to offer to producers to provide that ability to lock in good prices," he said.

There is a trend towards integrating more cut-out value, [email protected] Marketing general manager Bill Alford said.

"The cut-out, if it performs well, the packer is making money," he said. "High cut-out values mean their margins are good. So if the producer's price is at least tied to it or has a mechanism that has it as a component, we're going in the same direction together."

In May of this year, HyLife Foods in Manitoba introduced a pricing formula incorporating cut-out value.

Almost all producers delivering to their company have switched to the new option, said Dave Penner, HyLife Foods chief operating officer.

"The benefit has been to the producer, which, I think, is kind of what the expectation would be," said Penner, noting it means his company has paid more for hogs.

As a vertically integrated company, Penner admitted many of the hogs that run through their Neepawa plant are owned by HyLife Foods already. At the same time, he said, the company does also have a core of independent producers who supply hogs.

The company is currently a price leader compared to other companies in Western Canada, Alford noted, although he added Olymel has also introduced an option with a cut-out component in it.

Made-in-Canada pricing Canadian price basis has also reared its head during industry discussions.

The idea of disconnecting Canadian hog price from the U.S.prices they are currently based on is not new. Prices for feed, labour and new barn construction are all lower south of the border, said George Matheson, chair of the Manitoba Pork Council.

But hog prices here are based on those in the U.S. "Right now, all of the prices are discovered off USDA reported prices because Canada simply doesn't have the prices or data to use," Alford said.

However, in Quebec, the pricing structure includes cut-out value as well as a premium for quality pigs.

"But there's a legal framework in which this occurs," Dickson said.

The result is a system that is more heavily government regulated, he noted, and there would have to be legislative changes in order for such a system to be pursued in Western Canada.

The system is also far from set in stone. The formula, set out in 2019, took the U.S.benchmark price and applied both a price floor and price cap based on cut-out value. Benchmark price should be within 90 to 100 per cent of the cut-out value, the formula said. If below that level, prices would instead shift to 90 per cent of cut-out value. If above, the full cut-out value would serve as a price cap.

"In 2020, because of the problems they ran into with staff shortages at the plants and so on, the packers went back and talked to the board and said, 'This isn't working very well,'" Dickson said, noting that the "cut-out window" increased sharply to pull up the price floor.

An interim formula has since been set out.

Packers did provide some relief during the height of the market issues, Fitzgerald noted, with Donald's Fine Foods offering a base price of $1.40 a kilogram during those tight weeks, Maple Leaf offering an extra $20 a pig for 13 weeks — with the caveat that a producer sign on with them for another year and the Olymel cutout incorporation.

The western boards hope more meetings with packers are in the cards for the future.

GLACIER FARMMEDIA "The cut-out, if it performs well, the packer is making money. High cut-out values mean their margins are good. So if the producer's price is at least tied to it or has a mechanism that has it as a component, we're going in the same direction together."

Source : Alberta Farmer Express