In pursuit of producer-packer shared value

By Andrew Heck

Shared value, or lack thereof, has been on the minds of many producers these days.

In the Summer 2020 edition of the Canadian Hog Journal, we introduced the work taking place behind the scenes between western Canadian provincial pork producer groups and processors: “Producer-packer tensions threaten viability.”

In mid-May, the pork producer organizations in B.C., Alberta, Saskatchewan and Manitoba issued a joint invitation to executives from Donald’s Fine Foods, Maple Leaf Foods and Olymel to have an open and frank discussion on the state of the industry, and to work for solutions that create shared value for producers and processors.

“We appreciate the opportunity to engage in these conversions, as well as the time committed to the discussions,” said Darcy Fitzgerald, Executive Director, Alberta Pork. “We look forward to seeing tangible outcomes, and we will keep producers updated as the process continues.”

Initial meetings with all three packers took place virtually in mid-July and early August, with further commitments made to conduct additional meetings in the future. Following the meetings with Donald’s and Maple Leaf, the producer groups released a summary of their discussions and findings, which received a great deal of attention from across the supply chain. The initial meeting with Olymel was conducted following the release of that summary, approximately one month after the provinces had met with Donald’s and Maple Leaf.

Olymel demands CPE, rejects Quebec-style pricing

The Quebec pricing model has been looked upon favourably by many in the hog industry across Canada, but processors have been reluctant to adopt it.

Notably absent from the meeting between the western producer groups and Olymel was Réjean Nadeau, President & CEO. However, Casey Smit, Vice President, Swine Production, Western Canada and Ian Moon, Manager, Hog Procurement, Western Canada were available to provide an overview of the company’s 2021 contract.

In late June, Olymel introduced its new contract, which includes a split between 50 per cent of the HM-LM201 price plus 45 per cent of the PK0602 cut-out value. A wider grid index and premiums are also offered on top of the calculated price. The contract addresses producer desires for cut-out value inclusion and helps reduce the negative pricing valleys, but the use of an index factor, common to most packers, takes away some of the price peaks, as does using only 90 per cent of cut-out in the formula.

A large caveat, however, is that the Olymel 2021 contract requires producers to be certified under the Canadian Pork Excellence (CPE) program. In western Canada, especially Alberta, CPE adherence remains very low following two years of deliberation between producers and packers, as highlighted in the Winter 2020 edition of the Canadian Hog Journal: “Quality assurance brings value, but who pays?” Training on CPE has not yet been delivered at all in Alberta, and it is being slowly introduced in Saskatchewan and Manitoba. The process takes months for producers to become fully certified, which could jeopardize their eligibility for the contract in the immediate future.

On a positive note, the new formula would only require a small change to create large gains and improve the industry outlook. For Olymel’s 2020 contract, also reflected in the 2021 contract, the company introduced bonuses for carcass weight, loin depth and proximity to the Red Deer plant. The proximity bonus has no official distance cap; however, it was suggested that anywhere farther than approximately 600 kilometres from the plant (about as far east as Swift Current, Saskatchewan) would not receive full compensation on distance. The 2021 contract increases the five-year average price over the 2020 contract price by $0.07 per pig.

Further to the contract discussion, the producer groups were disappointed to learn that Olymel had effectively shut the door to any consideration of supporting a ‘Quebec-style’ pricing system in western Canada, which could help alleviate some of pricing woes producers are experiencing.

The Quebec model uses an average value between a whole carcass value and the USDA cut-out value, taking a percentage of each to arrive at a final price. In Quebec’s 2019 to 2022 marketing agreement, that amount is a 50 per cent of each the whole carcass and cut-out. However, since the start of the COVID-19 pandemic, an ongoing dispute between Olymel and Les Éleveurs de porcs du Québec (Quebec Pork) has resulted in an adjustment, which currently uses 65 per cent of the whole carcass and 35 per cent of the cut-out. The decision to make the adjustment was the result of processor pressure.

Maple Leaf arrives prepared for serious discussion

Cost of production acts as a benchmark for determining profitability. Even at a generous $185 per pig, the picture is not pretty for producers.

Prior to Maple Leaf’s meeting with the western producer groups, the company issued a letter to its producers offering $20 per pig for 13 weeks if an extension of one year was added to their current contracts. This interim help is appreciated but will not address the systemic pricing problem for producers in western Canada nor the large pending financial shortfall projected until May 2021.

During the meeting, some attention was paid to the western provinces’ cost of production figures. Because there are nuances between Alberta, Saskatchewan and Manitoba, a round number of $185 per pig was chosen as a benchmark to demonstrate producer losses across the three jurisdictions.

Maple Leaf officials questioned why the benchmark was set that high, but for the provinces, the number was an appropriate median between a rare, low-end cost of production at $165 per pig versus a more common, high-end $200 or more per pig. Anecdotal evidence from Manitoba suggests some highly efficient producers fall within that low-end range, whereas data recently collected in Alberta shows many producers sit closer to the high-end range.

The initial meeting with Maple Leaf proved to be an important extension of an olive branch between the two sides. Much discussion centred around competitiveness challenges for both producers and processors relative to their U.S. counterparts.

For processors, the Canadian producer’s disadvantaged spot also puts hog buyers in a tougher situation compared to U.S. processors. A main difference, however, is capacity: in the U.S., prior to temporary plant shutdowns due to COVID-19, processors were nearing 100 per cent capacity, with slaughter and export volumes at record highs. In Canada, the same cannot be said for capacity, despite a similar trend among U.S. and Canadian pork exports.

Due to increased supply in the U.S. this year, prices have been depressed. While that reality conforms to the laws of supply and demand, we have seen the reverse effect in Canada, where supplies have been lower than packer demand, but pricing is telling producers to reduce supply or even exit the industry, in some cases. For producers, in addition to negative pricing signals, an added difficulty surrounds the Canadian federal government’s lack of financial support relative to what U.S. producers have received in the past three years.

While shared challenges were discussed, so was market potential. Maple Leaf believes its corporate initiatives – such as ‘raised without antibiotics’ status and ‘carbon neutrality’ – have benefited the brand in the eyes of consumers. Producers, likewise, take care to adhere to quality assurance measures, though it is often unclear how those efforts translate into value back to the producer. Many producers would say the value is absent without any tangible strides to reward the production behaviours that brands are built upon.

Donald’s willing to work toward producer equity

During Donald’s Fine Foods’ meeting with the western producers groups, the company announced that it would operate a floor price of $1.40 per kilogram per pig over a four-week period to help address the current pricing situation while further options are considered for the future. An additional four-week period was announced thereafter, for a total of eight weeks. While this extra cash infusion is welcomed, unfortunately, the losses for producers continue to accumulate at a significant rate with little long-term support on the horizon.

Donald’s offerings amount to an extra $20 to $25 per pig in the short term, but there is no change to the current formula going forward. Donald’s formula is based on the Maple Leaf Signature 4, with the additional benefit of having transport costs fully covered. This helps ensure Donald’s maintains its largely out-of-province hog supply.

HyLife leads when it comes to producer support

HyLife was not included in the recent shared value discussions, given the company’s proactive steps to working with producers. While all western Canadian processors are looking to expand, HyLife is taking a balanced approach.

When it came to extending the shared value meeting invitation to packers, HyLife was excluded, albeit not out of disrespect. From the perspective of many producers, especially those who sell their pigs to HyLife, there is a lot of promise on the horizon for cooperation.

In April, HyLife met with the company’s independent producers to discuss the creation of a new hog pricing formula – one which utilizes the existing Chicago Mercantile Exchange (CME) whole carcass price, along with a new index factor, premium structure and weight-based grid, as well as incorporating a window price using USDA cut-out prices.

Concerned with the springtime shutdowns of pork processing plants in the U.S. due to COVID-19, HyLife decided to cushion volatility in the CME and cut-out price by implementing the new formula in a phased approach: If the CME price is between 90 and 100 per cent of the cut-out, then CME is the default, but if the CME price is greater than 100 per cent of the cut-out, the default is 100 per cent of the cut-out.

HyLife’s transition to favouring cut-out pricing is a clear demonstration that some processors in western Canada are willing to adapt in a way that is profitable for all. By implementing its new formula, HyLife is also demonstrating its willingness to address producer pricing concerns and strengthen relationships with producers who supply the company’s hogs. All things considered, HyLife’s new formula amounts to an estimated $20 per pig increase, indefinitely, over the previous formula.

Producers push for greater transparency

One of the major stumbling blocks in the pursuit of shared value so far has been transparency – between producers, processors and retailers.

In early March, Alberta Pork introduced the concept of a pricing calculator for producers in attendance at the organization’s semi-annual meetings across the province, with much encouragement expressed for the initiative. Not long after, work was undertaken to develop the tool, which is now allowing producers to compare their existing contracts with hypothetical conditions offered by other processors.

In mid-July, an eagerly anticipated hog pricing calculator was made freely available on the Canadian Pork Council’s (CPC) website. The calculator uses pricing formula data compiled in-house by Alberta Pork, based on U.S. Department of Agriculture (USDA) mandatory reporting, which is also the basis for Canadian prices. Further work is currently taking place to refine the accuracy of some metrics. In only the first three weeks following its launch, the calculator had been used more than 1,000 times by website visitors from across North America.

While red meat costs have surged, poultry and plant-based protein costs have decreased. At this Real Canadian Superstore in Edmonton, in mid-July, President’s Choice brand frozen ‘chickenless breasts’ were similar in price to boneless, skinless real chicken breasts, albeit seemingly less popular.

Based on data from Agriculture and Agri-Food Canada (AAFC), comparing 2019 and 2020, processors’ export profits were up 25 per cent, collectively earning those companies more than $440 million or $28 per pig extra over the previous year. Meanwhile, for retailers like Loblaws, both profits and costs grew as a result of COVID-19. In the first quarter of 2020, Loblaws generated $240 million of revenue, compared to $198 million during the same period in 2019.

Going forward, the CPC and its provincial members hope to continue working to develop new initiatives to highlight issues not only for industry stakeholders but the general public as well. Suffice to say, the processing and grocery businesses have been very lucrative in recent months.

Typical summer pricing bump non-existent this year

In July 2020, China imported more than double the amount of pork as in July 2019, which itself was double the amount of pork imported in July 2018. Producers have not benefited from this incredible growth.

In most years, summer pig prices experience a boost due to increased domestic consumer demand, among other reasons. This year, while the increase in demand was palpable both domestically and internationally, prices for producers did not respond nearly as positively as they did for other supply chain partners.

In China, lingering issues like African Swine Fever (ASF) resulted in sky-rocketing meat prices for Chinese consumers – a phenomenon that was exploited to its full potential by all global pork players in the race to fill the enormous and growing Chinese protein gap.

Domestically, as locked-down Canadians started cooking at home more frequently compared to pre-COVID times, grocers raked in the profits, while restaurants and other food service providers generally suffered due to forced closures and public hesitation.

Various factors including North American meat plant temporary shutdowns helped drive up retail prices for pork and beef, to the tune of 30 per cent higher than this same period in 2019. To make matters worse, in August, Walmart and United Grocers – a national food procurement organization representing many major retailers – imposed new ‘supplier fees’ that are designed to breed competition and exclusivity when it comes to stocking products. As a result, the Canadian Federation of Agriculture (CFA), Food & Consumer Products of Canada (FCPC) and other organizations joined forces to raise concerns about the potential impact of the fees, which are considered arbitrary and unreasonable, threatening the affordability and security of Canada’s food supply.

In September, Walmart also eliminated its price-matching program, a long-time hallmark of the company’s commitment to keeping prices low for consumers. The move comes at a time when unemployment is at a decade high across Canada and has more than doubled in some provinces.

Government support still desired, albeit cynically

For most producers, consumer pricing surges either internationally or domestically were merely a slap in the face as margins remained submerged in a sea of red ink. These pricing woes have been met with a substantial non-response from the Government of Canada.

While the feds continue to insist that producer support is being effectively delivered, no meaningful publicly available data has demonstrated just how much money has actually reached producers’ pockets, and the government has given no indication that further comprehensive support is forthcoming any time soon, despite renewed calls from the Canadian Pork Council (CPC) to make adjustments to AgriStability’s payout levels. Given the long-term depressed pricing situation, it has come to a point where many producers have lost so much equity that any further losses are incapable of triggering an AgriStability payout.

On separate occasions earlier this year, the CPC had asked for the AgriStability reference margin to be increased from 70 to 85 per cent, along with a request for an ad hoc payment to producers at $20 per head – both of which were summarily rejected. As such, outgoing federal ag critic John Barlow did not mince words in expressing his disappointment with the efforts of Marie-Claude Bibeau, Minister, Agriculture and Agri-Food Canada:

“Minister Bibeau has to pound her fist on that cabinet table saying, ‘You know, enough is enough! Canadian agriculture needs attention – needs should be a priority, and we need to step up.’ That’s her job. Right now, I don’t think she has the clout at the cabinet table. If she did, we would see an assistance package already announced.”

Progress is slow and overdue but welcomed

In August, Alberta Pork publicly reported that a number of prominent commercial hog producers were actively undergoing a reduction in breeding stock at a minimum of 25 per cent of their herds, and, in some cases, as high as 50 per cent.

“If something doesn’t change dramatically, and soon, we’re going to see the coming year look like the last five,” said Andrew Dickson, General Manager, Manitoba Pork. “The industry is going to continue to integrate, which will result in independent producers becoming landlords – unable to afford their own operations and instead leasing barns to packers.”

As shared value discussions move forward, involving a greater number of producer and packer representatives, working collaboratively, the pricing situation will not be solved overnight. It will take a constant, concerted effort on the part of all stakeholders to drive meaningful change for the entire industry.

As we take a closer look at ourselves and where we want to be, consumers too are noticing us, often for unfortunate reasons. Especially since COVID-19, our less-glamorous side has been ripped open wide for all to see, while the positive work we do to secure Canada’s food supply has often been ignored.

For processors and retailers, it is likely easy to get wrapped up in playing public relations defense in these situations, and for producers, it is equally easy to get wrapped up in financially charged offense against value chain partners.

We all have a role to play in keeping this industry viable. For some, that objective may still seem very attainable, but for others, it is looking less so. Realistically, if any part of the value chain weakens to the point of breaking beyond repair, we are all going to be in trouble.

The time to work together is overdue.