Export Value for Canada

Export values are a hot topic lately. That is in part due to the fact that producers think Canadian packers are getting more in the market than normal. That in turn is due to the fact that U.S. packers are in the middle of a trade dispute with Mexico and China. Producers believe Canadian packers are able to attain higher prices as a result. That is proving to be true, at least with Mexico, for now – but what about overall? Does Canadian pork get a premium in export markets because it is Canadian?  

Over the course of 2017, Canadian pork exports of 1.1 billion kilograms on a payweight basis amounted to about C$3.6 billion. That is a unit value of about C$3.25/kg. Total U.S. exports of 1.9 billion kilograms last year amounted to US$5.3 billion. That works out to US$2.79/kg or C$3.62/kg. The U.S. unit value was 10+-% more than the Canadian unit value in C$.

On a country basis, the U.S. unit value was about 5-10 per cent more to Japan and well over 25 per cent more to Taiwan. The top volume countries all saw higher values going to the U.S. This does not mean that Canadian packers are receiving less for the same cut products exported to the same countries. It could just mean that our export product mix contains items of less value. That is not necessarily a negative. On the positive side it could simply mean that the more valuable cuts are staying in Canada or are sold to the United States. That would be more profitable, often. All products go to the market with the highest value, it is best if that is Canada or the United States given logistics.

Another reason U.S. values might be higher is that U.S. packers have advantages because they are much less export dependent. That is the export price is a higher hurdle for U.S. packers before it is worth moving product offshore. U.S. packers have the advantage of having a strong internal market (they export less than us in Canada). Some cuts are higher in the U.S., so they are less dependent on exports than we are. As an example, the retail loin market is a lot larger in the U.S. than in Canada.

With that noted, more specific items such as hams to Mexico also show the U.S. deriving more value. In 2017 the U.S. unit value of hams to Mexico was C$2.12/kg while the Canadian value was C$1.88/kg. That in turn is likely a reflection of the costs of doing business between Canada and Mexico versus the much lower costs between the U.S. and Mexico. In other words, there are a myriad of reasons for different export unit values.

Canadian packers add value

The data notwithstanding, there are times and cases where Canadian packers do attain higher prices than their U.S. counterparts. This is often the case in Japan and Korea, and to a lesser extent Taiwan, Philippines, Aust, and NZ, which are leading markets. The main reason for the higher prices is Canadian packers’ adherence to specifications. That equates to better yield.

In other words, Canadian packers compete against their larger U.S. counterparts in the same way that smaller firms in all industries compete against larger firms –adherence to detail and service. This is nothing new. Another reason for an advantage in Japan is due to the western barley fed hogs which produces a darker pork with whiter fat which that market favors. Others in Canada have switched genetics to those more favored in Japan. Again, this is more of a customer focused approach which is text book business practices for smaller firms versus bigger firms.

The field is always changing though and the old formula may not hold. Many U.S. packers have been able to develop good markets with strong brand recognition/loyalty (Hormel, Smithfield, Hatfield, etc). The question for the future will be how do those new marketing efforts compare with Maple Leaf, Olymel or Hylife exporting chilled pork in Japan or other higher end markets?  Will any Canadian advantage hold against these U.S. efforts?

Not a Canada-wide attribute

The bottom line is that Canadian packers are willing to accommodate export customers. This is often because of the smaller plants which facilitates this flexibility and accommodates the customer better than large plants. There is also the ractopamine-free issue or other protocols that the U.S. industry may be unwilling to accommodate.

Another important point is that the added value per kilo, if it does exist is specific to each market and each packer. It is not a Canadian value. It is not a Canada-wide attribute, and has more to do with what happens to the pork after it reaches the packer than what happens at the farm.

Under-utilized plants are costly

Western Canada has the capacity to slaughter about 200,000 head per week. On a typical week, the slaughter is about 163,000, for an 82 per cent plant capacity utilization rate. The utilization rate in the U.S. is around 95 per cent.  Of course some plants, like HyLife are running full out while others like Maple Leaf Brandon and Olymel Red Deer are not.

Of course, plants that are not run at full capacity also costly. Money is not left on the table in terms of added payments to vendors, but it is lost nonetheless. It is lost in terms of higher kill costs per head and lost productivity.

Take for example a fictional plant on the prairies that is supposed to kill 45,000 head per week. That is about Red Deer’s size. That fictional plant might have kill and cut costs of about $55 per head. Thatwould put weekly costs at about $2.5 million of which about a third might be fixed overhead. The reality, however, is that much of the variable costs are also going to be fixed. Labour, a variable cost in theory, is not going to decrease if numbers are not where they should be. If, therefore, that plant is only running 38,000, like Red Deer has, the costs per head could easily go to $62-$65. Reduced kills add serious costs per head.

On the flip side, if the plant was at full capacity, any week that this fictional plant could run the odd half day on a Saturday would drive the entire week’s average kills down by at least $3/head.

Those numbers fit well with a rule of thumb that says for every increase or decrease in production by 10 per cent leads to a corresponding increase or decrease in costs by about 5-10 per cent.

The above example is a simplification but it does show the costs associated with underutilized plants. These added costs take away competitiveness and drive down profits.

Kevin Grier Market Analysis and Consulting provides industry market reports and analysis, as well as consulting services and public event speaking. You can reach him at kevin@kevingrier.com to comment or to request a free two-month trial of the Canadian Pork Market Review.