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GrainWorld: Hog sector finally seeing some profits

Winnipeg (Resource News International) — Canadian hog producers are starting to see some profitability for the first time in over two years, but whether or not those profits stay is seen depending on the value of the Canadian dollar.

Analyst Steve Dziver of Winnipeg-based Phoenix Agri-Tec Inc. told the Canadian Wheat Board’s annual GrainWorld conference here Tuesday that Canada is a price taker, not a price maker, in the hog industry, with prices in the country directly following U.S. values due to the interrelated nature of the North American market.

Through most of 2007 and 2008 the strength of the Canadian dollar, which was worth more than the U.S. dollar at one point, put Canada at a competitive disadvantage to the U.S. Now that the Canadian dollar is back around US80 cents, Canadian prices are more competitive.

However, while Dziver thought it would be tough for the Canadian hog sector to survive with a Canadian dollar above US90 cents, a strong U.S. dollar would also not be good for the overall health of the industry. He pointed out that U.S. exports benefit from a weaker U.S. dollar.

Overall, Dziver thought a Canadian dollar around US80 cents would be the best for the domestic industry.

There’s a four-year cycle of hog prices, he said, which starts with a recovery of prices during the first year, followed by two years of stability, and then a collapse in the fourth year. He saw 2009 as the third year of the cycle, which means prices should be steady for most of the year before eventually starting their downtrend in the fourth quarter.

Using an US82-cent Canadian dollar as a base, Dziver forecast hog prices of US$60 per hundredweight (C$140 per hog) during the first quarter of 2009, trending upwards to US$75 per cwt (C$167 per hog) in the spring and US$78 per cwt (C$174 per hog) in the summer, before eventually dropping back to US$68 per cwt (C$152 per hog) in the last quarter of 2009.

With an average cost of production in Canada of C$135 per hog, he thought there was finally some profit to be had in the hog sector.

Demand or supply?

Aside from the exchange rate, which will determine the difference in Canadian prices compared to the U.S., Dziver said the big question to be asked in the hog sector is, “What’s falling faster, pork demand or pig supply?”

He expected North American pork production, which is already slightly behind the year-ago level, would see a larger reduction beginning in March and April.

From the demand side, Dziver pointed out that U.S. numbers were showing a reduction in exports. However, he expected domestic disappearance to increase, keeping the demand from falling as fast as production, and thus keeping prices supported.

Another factor that is causing some concern for the Canadian hog sector is U.S. country-of-origin labelling (COOL) laws set to come into effect in mid-March.

Uncertainty about what the rules will mean for Canadian hogs entering the U.S. has already caused Canadian hog exports to the U.S. to drop off considerably. Dziver pointed out that Canadian live hog exports now account for about five to six per cent of the hogs slaughtered in the U.S., which would compare with 11 per cent a year ago at this time.

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