By Bijon Brown
Editor’s note: Bijon Brown is the Production Economist for Alberta Pork. He can be contacted at email@example.com.
The impact of African Swine Fever (ASF) on markets in Asia and Europe continues to be a tale of woe for the global pig and pork industries. With ASF’s arrival on the doorstep of the Americas – in Haiti and the Dominican Republic – we are reminded just how close it is to the continental U.S. and Canada.
The discovery of ASF in either the U.S. or Canada would mean significant losses of pigs, pork and, ultimately, profits for the entire industry, including farmers and meat packers. To mitigate these possible economic impacts, we must take a closer look at how our national industries are linked and what some of our options are.
Canadian pig and pork markets are highly dependent on the U.S., as dictated by hog pricing data collected by the U.S. Department of Agriculture (USDA), which informs hog prices paid to producers by export-certified ‘federal’ packers overseen by the Canadian Food Inspection Agency (CFIA). As of September 2021, Canada had exported nearly 300,000 metric tonnes of pork to the U.S., in addition to nearly four million weaners and more than one million finishers, breeding stock and cull hogs. These cross-border movements have generated more than $500 million in revenue.
In contrast, just over 150,000 tonnes of U.S. pork made its way to Canada during that same time, and Canada is not a major importer of live hogs. The sheer size of the U.S. market dwarfs the Canadian market, which is why it is even more important for the Canadian industry than the U.S. industry to evaluate its position in response to ASF. This poses an interesting dynamic if ASF enters either of our countries, significantly impacting Canadian producers and packers either way.
What to expect if ASF enters the U.S. first
The U.S. consumes about three-quarters of the pork it produces, and the remaining one-quarter is exported. In the event ASF enters the U.S., the country would still be awash with pork.
The U.S. hog price is quite responsive to the pork export price. Specifically, a one per cent fall in the price of pork exports is expected to lead to a 2.4 per cent decline in the price of hogs. This, however, is an incremental relationship characterizing the impact of small changes in the export price.
For an abrupt loss of the export market, alternative approaches would be required. Almost overnight, U.S. pork prices could fall by one-quarter, without even considering the price effect of excess supply sitting on the domestic market – unable to be moved outside the country. Hog prices are even more volatile than pork prices, so the shock to the hog price would be even more significant. Nevertheless, this price drop is not expected to be permanent, as producers would adjust to the new pricing signals they face and ease production. In time, domestic demand will take care of some of the excess supply, and markets will stabilize, albeit at a lower price.
Since Canadian packers rely on U.S. prices, it is expected that Canadian hog prices would fall sharply even though ASF had not entered Canada. Such a price drop in the immediate term would be a great benefit to Canadian packers, as they would be able to purchase market hogs at ASF-weakened prices and sell the pork at a premium on the world market. Producers, on the other hand, would be left to bear the immediate burden. However, if such conditions lasted for any length of time, many independent producers would be forced to quickly exit the industry, which would seriously dwindle available hog supply for packers. As such, the medium- to long-term outlook would be bleak for everyone.
What to expect if ASF enters Canada first
If ASF enters Canada before the U.S., our industry picture will be even darker for producers and packers, as our export-dependent supply – representing about 70 per cent of all pig and pork production in the country – would be left without an end destination. With domestic Canadian pork consumption of around 800,000 tonnes per year, it would take more than two years to get through one year’s worth of production. Consumers would need to more than double their consumption of pork to overcome this surplus – completely unreasonable.
Managing the crisis from a pricing standpoint – which is only one part of the much larger puzzle – would require significant adjustments at all levels of the value chain, but especially at the producer level. Supply regulation would be required swiftly, as well as a robust price support program to help the industry navigate the prospect of near-total decimation.
The relationship between U.S. and Canadian hog prices is a one-way street. ASF in Canada would not impact U.S. prices, and the market signal would actually prompt U.S. producers to increase production to fill the gap left by the absence of international Canadian pork exports. Inversely, Canadian producers would need to make substantial cuts to production, in response.
Canada, being an isolated market, would therefore require a domestic price to reflect the new situation. Currently, there are no mechanisms available to collect domestic pricing information provincially or federally. Without a handle on domestic prices, government support would need to kick in, if producers and packers have any hope of recouping losses. Even so, compensation rates would need to be tied to current market prices, but if there is no way to collect this information, governments would have no basis on which to assess the scale of losses. Urgent attention, therefore, ought to be placed on creating transparent pricing information.
The direct hog price impact is just one angle of the larger financial impact. The shock to the system will increase the anxiety levels of lenders who may want to call outstanding balances to be repaid and cut off existing credit lines. Financing is the lifeblood of many farming operations, and if these supports disappear, it would create substantial difficulties for many businesses.
Sooner than later, price transparency discussions need to take place. Governments already have experience dealing with this kind of mass crisis, given the COVID-19 income support response, but will they be open to talking ASF? It is worth considering that COVID-19 has affected millions of Canadians, while ASF’s impact, however terrifying for our industry, would be much smaller in its reach. It is incumbent upon pork industry stakeholders to act now, rather than wait for solutions to fall into place.
Producer-packer risk-sharing may be optimal
Recognizing that few good pricing options exist for the Canadian industry in the event of an ASF outbreak, even in the U.S., our national industries could continue to operate under the existing framework, or employ a risk-sharing model backed by government support for transparent pricing information, or implement a price floor for hogs to prevent a rapid decline that would cripple farmers financially.
If everything stays the same, prices will continue to be based on what happens in U.S. markets. The only support to producers would be voluntary hog price insurance or business risk management programs like AgriStability. Current hog price insurance premiums are considered prohibitively high, and uptake of hog price insurance has suffered, as a result.
Even if AgriStability were to be triggered, provincial and federal governments may have the option of introducing a price floor, which would soften the blow of losses. Price floors are not new; in fact, they were used in the U.S. during the Great Depression. A price floor in the case of ASF would not require government funding but rather legislation that dictates hog prices cannot fall below a minimum threshold for producers. Importantly, Canadian packers would not suffer from this kind of support to producers, as U.S. packers would be absent on the global market, providing considerable leverage for Canadian exports, which would spell higher pork prices.
But what would be the ideal price floor to protect producers while also ensuring packers can continue to profit? Establishing an effective price floor requires transparent, Canadian-based hog pricing data. By sharing revenue more equitably across the value chain, governments can have confidence that our industry is doing everything it can to defend itself, rather than looking for handouts.
As an alternative to price floor legislation, the industry could, perhaps, come together and solve the problem without government intervention. If producers and packers could agree to share the revenue and risk from pork sales, many of the potential hurdles to insulating the industry against losses in the event of ASF would disappear naturally. Such an arrangement would correct the hog pricing signal mismatch between the linked U.S. and Canadian markets, and it would facilitate more equitable distribution of profits while satisfying government.
Zoning could alleviate some pressures
Zoning is the unsung but somewhat unreliable hero of ASF preparedness. Many efforts are being made to negotiate zoning agreements with Canada’s major pork-trading partners – including successful ones with the U.S., European Union (E.U.), Vietnam and Singapore – but notable liabilities still remain with important countries like China and Japan, especially. China’s track record in this regard is predictably poor for any country that finds itself impacted by ASF, but Canada’s long and trusted relationship with Japanese buyers is one that our industry is keen to preserve.
In the case ASF enters the U.S. first, Canada would been seen as an easy outlet for surplus U.S. pork. It could be expected that a flood of U.S. pork would arrive in the Canadian domestic market. Given the pricing linkage, this would actually help alleviate the dip in U.S. pork prices, positively impacting U.S. hog prices and consequently helping Canadian producers a bit.
In the case ASF enters Canada first, producers in non-infected zones would still be able to ship pigs to packers, and that pork could continue moving into the U.S. Likewise, the movement of weaners and culled hogs, primarily, would be allowed. However, it would be unsurprising to see a significant price discount for Canadian shipments, which would still result in major losses across the value chain. Despite that reality, zoning arrangements may help the cause of ASF recovery, but this assumption relies on these agreements being honoured in the time of actual crisis, which is never guaranteed.
The time to act is now
Through the introduction of price floors, zoning agreements and other work being done to prevent and prepare for ASF, profit- and risk-sharing options are on the table for the Canadian pork industry if hog price transparency is established.
It is worth noting that the expectation of government support should not be the default position of the industry in the event ASF arrives. A more workable approach is to seek solutions internally – among industry stakeholders – to ensure that ASF’s devastation does not spell our complete demise. Urgent action is needed.