By Bijon Brown
Editor’s note: Bijon Brown is the Production Economist for Alberta Pork. He can be contacted at email@example.com.
Human and animal disease, inflation and eco-consciousness all have a role to play when it comes to hog market trends in 2022. Brett Stuart, an analyst with Global AgriTrends, delivered a presentation during the first plenary session of the 2022 Banff Pork Seminar on the hog industry’s economic outlook for this year, highlighting some key challenges and opportunities facing producers.
COVID-19 not going away just yet
COVID-19 continues to be a recurring nightmare. It has brought the global economy to its knees, impeding productivity and the movement of goods and services for more than two years. The latest variant, Omicron, seems to be less lethal but more highly transmissible relative to the other strains of the virus.
“This thing is going to last a lot longer than people think,” said Stuart. “But I expect the severe effects will fade in 2022.”
The lives lost and long-term health complications associated with COVID-19 could have a lingering impact on the domestic labour pool for years and decades to come. Unions have taken advantage of labour shortages to push for higher wages at a time when business revenues have been down. With fewer people showing up to work, the government response in Canada and the U.S. – where Stuart is based – has mostly involved throwing money at the problem.
“It’s the world’s largest macroeconomic experiment. The wildfire is COVID-19, and the fire bomber is the U.S. Congress,” said Stuart. “And it isn’t just the U.S.; economies around the world, and governments, have done the same thing… When does the party end? The party doesn’t end until the money runs out. And there’s a mountain of money.”
The amount of money circulating in the economy grew significantly during the pandemic. In Canada, money supply grew by almost 30 per cent to roughly $1.3 trillion. This accelerated stimulus was necessary to keep the sputtering economy from stalling in mid-flight. The surge of money supply, combined with low interest rates, generated increased demand, especially in 2020.
What were considered everyday activities pre-pandemic – such as eating out, travelling and attending large-scale events – came to a halt as COVID-19 restrictions were put into place. With consumers looking for ways to keep spending, attention was diverted to home buying, home renovations and other isolated forms of activity. This placed pressure on product and service inventory levels, and with the supply chain on life support, significant bottlenecks were created. Ultimately, high demand and significantly constrained supply had to be resolved by higher prices, generating inflation.
By spring of last year, inflation awoke from its decade-long slumber and has been ballooning ever since. Canadian inflation soared to a 30-year high of 4.8 per cent in December 2021, some 1.8 to 2.3 per cent above the Bank of Canada’s target rate. With inflation this high, many analysts were expecting our central bank to raise interest rates in January 2022.
Instead, rates were kept steady, mainly due to the economic concerns stemming from the spread of Omicron. The Bank of Canada did, however, hint that rates will be increasing in the future, which could be as early as March. For producers with variable interest rates on their debts, it may be a good time to consolidate that debt into a low, fixed rate, as five to seven rate hikes are expected this year alone in Canada and the U.S.
“Interest rate hikes put increased pressure on consumers,” said Stuart. “That’s a BB gun approach to a big problem.”
An interest rate bump is only half of the response to inflation; the other half is getting the economy’s output to increase. This is largely outside of the central bank’s control, but without getting goods moving and people working again, there is a real risk that interest rate increases could trigger another recession, which could result in lower interest rates again.
The general theme of inflation in 2021 held true even for the hog industry, albeit for slightly different reasons. Hog margins eroded toward the second half of the year, due to higher farm input costs. For the livestock sector, much of that is represented by feed costs.
From a global perspective, grain prices could remain somewhat elevated this year, as a drought in Brazil and tensions between Ukraine and Russia intensify. Ukraine, being a significant exporter of corn and wheat, could have grain shipments heavily curtailed as a result of military conflict. This means tighter global supplies and higher grain prices. China’s role in the phenomenon has also become elevated.
“Hog prices in China fell 70 per cent last year. Corn didn’t,” said Stuart. “Until that Chinese corn price breaks, be very careful believing you’re going to get cheap corn this year.”
China has also been stockpiling grain and fertilizer. The country is one of the largest producers of nitrogen and potassium fertilizer but chose to ban exports late last year through to at least June this year. For more than three years, African Swine Fever (ASF) has been stubbornly flaring up and dying down in China, which has caused pig and pork prices and supply to rise and fall out-of-control.
China remains a mystery
Internationally, the wild card in the pack is China. China is such a significant player in both the hog and grain markets that its actions can singlehandedly change global prices. Over the past few years, China has used its ability to influence the market by manipulating supply, demand and prices in its favour.
“A Chinese shortage of 18 million tonnes of pork drove them to import a whopping only five million tonnes of pork,” said Stuart. “They could’ve imported much more. In fact, if you watched our markets in 2020, it was like China bought just enough pork off the U.S. and Canadian markets that it did not affect the price. They’re fine going without.”
Throughout 2021, Chinese hog prices were at or below the cost of production, after having been the equivalent of $300 per hog in 2020. Given that plummet in price, rapid liquidation of domestic hogs followed. To help create a bit of breathing room, the Chinese government cut pork import permits, restricting supply and providing some level of price support.
China’s ‘hog hotels’ – ironically, constructed in response to ASF – could well be ideal disease breeding grounds.
“The ASF story in China is far from over,” said Stuart. “I question whether the mega-farm concept really works. I think they’re going to prove that may have been a bad idea. It isn’t just ASF in China; it’s a raft of every swine disease known.”
As China struggles mightily with ASF, the disease continues its march west in Europe as well, infecting more barns in Germany and, most recently, Italy. These outbreaks have effectively taken Germany and Italy out of the export market. As the economic impact of this disease continues to escalate in Europe, Stuart believes government financial support may be required to get the European Union (E.U.) out of this crisis.
“I think the E.U. swine sector is headed for contraction in 2022,” said Stuart. “I think there’s going to be some talk and lobbying for a bailout – there’s going to have to be some government money.”
But when it comes to using cash as a bandage solution for ASF, it begs the question as to how much the industry and governments have learned from this approach to COVID-19. For at least two months prior to the pandemic, we in North America watched the COVID-19 devastation rip through Asia and Europe, but we did nothing proactively to stop it from coming to here. Will this happen with ASF, even if slower?
With ASF now on the doorstep of mainland North America – with cases popping up in the Caribbean – prevention efforts must be increased in an attempt to keep ASF out of Canada and the U.S., specifically. Whether prevention succeeds or fails, the world needs a cure.
ASF preparedness is top priority
A great deal of work has been done on crisis response and the emergency protocols that must be in place if ASF is found in Canada. This includes establishing zoning agreements with trading partners, drafting biocontainment measures to isolate potentially affected farms and developing protocols for the destruction and disposal of pigs. These are all very important, but rather than waiting for the disease to arrive, novel solutions should be sought to address the virus itself.
Many countries around the world have been working on ASF vaccines, but to date, none have been proven effective or safe. In January 2022, the Vaccine and Infectious Disease Organization (VIDO-InterVac) at the University of Saskatchewan received $140,000 in funding for preliminary work related to the development of an ASF vaccine. This is a good start, but it is clear that not enough resources have been dedicated toward staving off this impending crisis that would wipe out the Canadian hog industry.
In August 2021, the Government of Canada established a partnership with Moderna – a leading COVID-19 vaccine developer – to build a state-of-the-art vaccine production facility in Canada. Perhaps a when a suitable ASF vaccine is found, such a facility could be used to quickly ramp up production.
If ASF enters the U.S. wild boar population, it could cost around USD $50 billion to rectify. Even though the Canadian industry is much smaller than the U.S., spending millions to prevent ASF would be way more practical than spending billions to in response to its arrival in our countries. As such, it may be worthwhile for the industry and governments to invest more heavily in vaccine development and treatment option research, rather than risk being stuck with the cost of ASF clean-up.
Methane joins carbon as climate evils
At the beginning of January 2022, the Canadian price on carbon dioxide emissions increased to $50 per tonne, placing further strain on cost of production, as hog barn heating fuels are not exempt from the levy.
A study by Alberta Pork and Sask Pork, conducted nearly a year ago, assessed the carbon tax impact for farmers to be between $1.06 and $1.32 per hog in 2021, growing to between $1.32 and $1.65 per hog in 2022. That is no small amount, considering everything else hammering away at profitability.
The Governments of Alberta and Saskatchewan issued a constitutional challenge to the carbon tax before the Supreme Court of Canada in March 2021, which ultimately failed. In October, the Trudeau government doubled down and confirmed its support for the United Nations’ (UN) ‘Global Methane Pledge,’ which is poised to have significant implications for global agriculture. The plan is to cut methane emissions by 30 per cent below 2020 levels by 2030. This means that producers may be motivated to rethink strategies related to manure management and barn heating, to remain viable.
“The new war on global warming is a war on methane,” said Stuart. “If you go after methane, look who you get to go after: livestock.”
Stuart pointed to the work of researcher and professor Frank Mitloehner of the University of California-Davis as an example of how the story of methane has been distorted or misrepresented when it comes to the impact of livestock on the environment. Mitloehner – a prolific presenter and social media influencer within animal agriculture – published a lengthy podcast in December 2021 covering the issue.
“Globally, there are 560 teragrams of methane produced and 550 teragrams of methane reduced. In other words, there is a significant atmospheric removal of it. What that means is that there’s a process that kills methane. And why nobody reports about it, I don’t know,” said Mitloehner. “This whole climate discussion around livestock is more of an opportunity than a liability.”
The opportunity, according to Mitloehner, is for animal agriculture in the developed world to curb methane output, which could have a significant effect on reducing global temperatures. As an example, in California, dairy farmers can increase their revenue by around 50 per cent by covering their manure lagoons and capturing the renewable biofuel produced, which can be used to power farm machinery and trucks. Here in Canada, it might make sense to encourage the adoption of similarly innovative strategies.
Unfortunately, despite attempts to clarify the narrative, we have seen limitations placed on hog barn expansions in Europe for this very reason. The UN’s pledge is a clear signal that the hog industry needs to be proactive in measuring and reducing methane emissions to remain competitive.
Stuart estimates that, by 2040, the world will be short 23 million tonnes of pork. For producers who are able to withstand the war on methane, victory could mean higher hog prices and more profits spread across fewer global players. It may be an opportunity to get ahead of the pack and be an industry leader.
The horizon is hazy with signs of hope
Although Stuart sees a few short-run challenges to the hog industry, he also sees the light at the end of the tunnel. Business diversification and continued innovation are keys to a robust business model. The aim should be to develop new international markets while satisfying existing international customers and working to grow domestic pork consumption.
For the Canadian and U.S. hog industries, COVID-19, ASF and climate concerns reign supreme as threats this year, but threats are only as powerful as they are allowed to be. By getting ahead of these issues as much as possible, producers and packers can still find signs of hope on the hazy horizon.