Leveraging quality assurance for better pay

Pigs Sleeping

Alberta pork producers’ resolution demands $7 per head, and Olymel says it won’t pay up

By Sarah Hoffmann

In their ongoing pursuit of better pork pricing, Alberta pork producers may have found a leverage point as a new quality assurance program is to be phased in across Canada. 

Members of Alberta Pork passed a resolution at their November 20, 2018 annual general meeting saying they would only participate in the new Canadian Pork Excellence (CPE) program if packers agreed to pay an additional $7 per head for CPE validated hogs. CPE was developed by the Canada Pork Council and is intended to replace the current quality assurance program over the next few years.

Obviously somebody is making money. It’s just not the producer. ~ Darcy Fitzgerald, Alberta Pork

The resolution comes at a time when producers’ profitability per head is low and they feel they are being asked to do too much for too little. 

According to Brent Bushell of the Western Hog Exchange, a non-profit organization that markets hogs for Alberta farmers, the accounting firm MNP has compared producer profitability over the first three quarters of the last five years and found that farrow-to-finish barns lose an average of $1.05 per head and finishing barns have lost an average of $22 per head. 

Prices have been especially brutal since this summer when tariffs on U.S. pork into China and Mexico caused that country’s cash prices to sink. The prices realized by Canadian pork producers went along for the ride because the formula Canadian packers use to pay producers is based on the U.S. cash price – and likely the cheapest hogs sold on any given day.

However, there are no tariffs on Canadian pork into these markets and presumably packers are selling just as robustly, if not more so, considering the slow-down of U.S. supply. Producers just aren’t seeing the benefit of this steady marketing environment. 

“We don’t have the same trade war going on with our customers that the U.S. has and there are some benefits coming to Canadian packers, but those benefits aren’t coming to the producers,” explained Ron Gietz, economics extension specialist with Alberta Agriculture and Forestry. 

Some packers have posted record profits recently. Olymel, for example, increased earnings over the last three years, with their highest profit ever in 2017. According to the website of La Coop fédérée, the parent company of Olymel, the packer earned a record $290.4 million in 2017, which was a $39 million increase over 2016 earnings. 

Producers and their organizations are frustrated by the fact that they follow stringent quality parameters which allow packers to extract a premium in the world market, but producers do not share in the returns on this high-end pork. 

I’m not prepared to give hogs to a packer because we’re friends. They have to work for them or not get them. ~ Brent Bushell, Western Hog Exchange

Darcy Fitzgerald, executive director of Alberta Pork, pointed out that the top customer for Alberta pork is Japan, the highest paying buyer in the world. The original pork quality assurance program, known as CQA, was implemented in 1998, with updates since then. Alberta pork producer’s attention to animal welfare, feed quality, and traceability grant access to world markets to the tune of $500 million annually. CPE, the new program, would require even more training and record-keeping.

Fitzgerald said the resolution is not about anger at quality assurance programs themselves, but about the difficult financial situation faced by producers and the poor relationship they have with the packers.

“They are using this quality assurance program revision to say, ‘Enough. We need to start seeing money.’ That’s their frustration to say we are not seeing enough money for all the work we do to make this excellent pig.” 

These programs come with a cost, not only in administration and training, but also in the finished product. In 2013, Alberta and BC pork produces quit using a popular growth promotant called ractopamine, which is still used in the U.S. and some parts of Canada. This allowed Alberta packers Olymel and Maple Leaf to sell pork into China, Russia and other countries that ban the feed additive, but producers that eschew ractopamine aren’t paid a premium for their sacrifice. 

Richard Vigneault, spokesperson for Olymel, said the company neither requested the introduction of a new quality assurance program, nor are they willing to pay a flat rate per head for hogs produced under that program. 

In Quebec, where pork producers collectively negotiate contracts with packers, they make an average of $8-10 more per head than producers in Alberta. 

I honestly believe we have a five-year window to change this. If we can’t we may not even have a hog industry in Alberta. ~ Brent Bushell, Western Hog Exchange

“I think Alberta producers would be really happy if we got paid the same as guys in Eastern Canada,” said Fitzgerald. “Our number one market in Alberta is Japan and it’s a premium market. They’re looking for more product from us and economics 101 would say short supply, large demand, then price should go up. Obviously somebody is making money. It’s just not the producer.”

So far, he does not see a will to move back towards single desk marketing in Alberta. However, some hog farmers are taking a look at the Western Hog Exchange (WHE) as an option to block market hogs and leverage a better price from packers. 

This past April the WHE began to focus on marketing groups of hogs that were coming off contracts with packers. In the past, WHE marketed most of the hogs they represented to Olymel, but that has changed under general manager Brent Bushell.

“We represent about 10,000 hogs per week right now. We had probably too close of a relationship with one packer. I came on three years ago and we decided that’s not what we wanted to do,” said Bushell. “I’m not prepared to give hogs to a packer because we’re friends. They have to work for them or not get them.”

The WHE tenders out amalgamated, un-contracted hogs to packers and chooses the best price. Speaking of the farmers he sells for, Bushell said, “They’re not prepared to sign long term contracts. They’re not prepared to sell hogs based on broken pricing. They’re prepared to use their strength in number to negotiate the best price.”

Sometimes the best price is found south of the border. Even with ongoing trade wars and transportation costs, producers can still fare better in the U.S. than in Canada. 

“We’ve been able to ship hogs into the U.S. and be able to extract $25-30 more per hog,” said Bushell. “I’m extremely embarrassed by our Canadian packers for making this happen.”

As a result of WHE’s recent activities, they are seeing increased interest from producers outside Alberta. 

“In 2019 we will expand into Saskatchewan and Manitoba. I’ve been invited to a few meetings in Quebec,” said Bushell.

Fitzgerald pointed out that many weaner pigs leave western Canada to be finished in the U.S. This Canadian-born, U.S. finished pork still goes into premium markets – only with an American sticker on it instead of a Canadian one. 

“We’re competing against ourselves,” laments Fitzgerald. 

Meanwhile, Alberta packers are short 70,000-100,000 pigs a week to be slaughtering at full capacity, and production continues to decline in Western Canada, because producers cannot afford to build new barns. Some are even ceasing production in existing barns before they wear out because they can’t afford to keep operating at a loss.

From the packer’s point of view, the current pricing system is a matter of competitiveness. 

“We operate in a North American context and our goal is to remain competitive on the world market as well. This involves purchasing pork at the same price as our competitors in the USA. Our way to deal with the price is based on valuable market references,” said Vigneault.

But a packer needs animals to slaughter and Olymel has had to increase their swine herd to do so. Their subsidiary, OlySky, purchased a large farrow-to-finish operation in Saskatchewan in 2013 and recently added 20,000 sows to their Alberta herd, bringing their total western herd to about 60,000 sows. 

“We are always looking to increase the number of market hogs for our Red Deer plant and in order to do so, we will be looking to develop partnerships with producers on how we finish more hogs which can include contract finishing,” said Vigneault. According to La Coop fédérée’s 2017 annual report, their western hog production sector lost money in both 2016 and 2017.

Ultimately, both Fitzgerald and Bushell believe that packers need to negotiate an equitable price with producers or the hog industry in Alberta may not recover. 

“I think it’s a dangerous game [the packers] are playing to not sit down and negotiate something positive for everyone,” said Fitzgerald. 

Bushell goes so far as to put a timeline on the necessary recovery.

“They’re choking out their own supply of hogs,” he said of packers. “I honestly believe we have a five-year window to change this. If we can’t we may not even have a hog industry in Alberta.”