Hog farm income declines while consumer prices mount

Canadian farmers reeling from high costs, low prices, corporate control

By: Darrin Qualman, from The Farm Crisis and Corporate Power

  Canadian hog farmers have been hard hit by falling prices. The price decline began in October of 1998 and has continued over the following year. At its worst - November and December 1998 - hog prices fell to $25/hundred pounds (cwt) (dressed weight) in Manitoba and $22/cwt in Ontario. These prices are down markedly from the $70-$90/cwt range for the same months in previous years. While current prices have improved from their lowest levels, they remain below $60/cwt - far below the cost of production and $20 below recent averages.
  Political leaders, many economists, and the media blamed the hog situation on oversupply and the collapse of the Asian market. Figure 6 paints a more ambiguous picture. Canadian pork exports to Asia did decline, but they did so almost a year before the price collapse. By the October 1998 beginning of the hog price crisis, exports had recovered significantly and have since risen to levels surpassed only by four months of record exports in 1997. Exports for 1999 were far above 1996 levels, yet prices were far lower. It is hard to believe that a relatively small change in Asian exports, a market that consumes just 7% of Canadian pork annually, could cause prices to fall far below anything seen in the previous 23 years.
  Nor is the hog price downturn easily explained by looking at the retail price of pork. Figure 7 demonstrates that, while hog prices have remained the same over the past 23 years, packers and retailers have used their market power to increase the price of pork chops to the consumer by over 200%.
 

The NFU's Pork Links program supplies consumers with locally-grown pork at a 33% saving while producers sell at twice market price

  The current industrial pork production, processing, and distribution system is treating neither farmers nor consumers fairly. Farmers are forced to accept hog prices far below the cost of production and consumers are asked to pay ever-increasing prices for pork.
  Early in 1999, the National Farmers Union began working with its partners on a project called "Pork Links." In the midst of record-low hog prices, the Saskatoon Child Hunger and Education Program (CHEP), the Council of Canadians, and the NFU helped link family farm hog producers directly to urban consumers (many on low incomes). The program continues to grow and its economics are enlightening. Urban families can buy locally-grown pork at a 33% saving, and rural families can sell hogs at twice market price.
  The Pork Links program, like the comparison of grocery store pork and farm-gate hog prices (see Figure 7), demonstrates that hog farmers are receiving a tiny and declining portion of the grocery-store dollar. If hog farmers had maintained the 30% share of the grocery-store dollar that they enjoyed in the 1970s, current hog prices would be $1.10- $1.20 per pound (versus the 22¢ to 60¢ farmers received over the last year) and consumer prices would not be a penny higher than they are now. Seen another way, on the 21 million hogs marketed in an average year, a 30% share of the grocery store dollar would mean an additional $2.1 billion annually to hog farmers in increased farmgate returns.
  Like the grain price downturn, analysts often point to an oversupply of pork and hogs as the cause of the past year's price declines. If we grant, for the moment, that oversupply was the cause, it is instructive to look at how the other links of the pork production and distribution chain fared during this alleged glut of pork.
  Maple Leaf and Fletcher's are two of Canada's largest pork packing companies. The pork price crisis began in the fourth quarter (Oct.-Dec.) of 1998 and continue for two years. Low prices have forced hundreds, possibly thousands, of Canadian farmers out of hog production. Table E lists profits for Fletcher's and Maple Leaf.
  For the 12-month period of fiscal 1996, Maple Leaf made $42 million in profits. In 1997, it made $47 million. In 1998, it lost $23 million. In the most recent 12 months for which information is available (Oct. 1998 to Sept. 1999) - a period that overlaps the worst part of the hog price crisis - Maple Leaf earned record profits of $72.9 million.
  In its first quarter (Jan.-Mar. 1999) report, Maple Leaf alludes to low pork prices as a significant factor in its profitability, stating: "Maple Leaf Pork benefited from favourable commodity markets." In its second quarter (Apr.-June 1999) report, Maple Leaf notes that "Maple Leaf Foods International recorded excellent results due to strong demand from global markets, particularly in Asia." In its third quarter (July-Sept. 1999) report, Maple Leaf says: "The Meat Products Group and the Agribusiness Group both reported strong year-over-year earning increases." Maple Leaf's "Agribusiness Group" sells animal feed, including hog feed. In that same report, Maple Leaf also credits its profitability partly to "strong pork sales into Japan."
  Similarly, Fletcher's Fine Food recorded profits of $6.3 million for the 12-month period that overlaps the hog price crisis. This significantly exceeds the average profit for the previous three years ($3.5 million). The $6.3 million in profit works out to a return on equity of approximately 7.7%.
  However, Fletcher's management is not completely satisfied with its profits. Surprisingly, CEO Fred Knoedler cites "a shortage of hogs in Western Canada" as one factor holding back Fletcher's revenues and profits (November 10, 1999 news release). The hog price crisis becomes "curiouser and curiouser" when one learns that farmers are suffering due to hog surpluses and packers due to hog shortages.
  The pain of the hog price crisis is not spread equally among all the participants in the hog/pork markets. Farm families wrestle with bankruptcy while packing plant stockholders enjoy record incomes. Record packer profits seem inconsistent with the contention that there is a glut of pork on the market or that export markets are closing. Record profits are, however, consistent with the contention that increasing market power allows packers to take lavish profits while, at the same time, pushing down prices to farmers and wages to workers. Canadian packers have also forced workers to take a 40% wage cut. The two main costs in a packing plant are pigs and people. Packers are getting their people 40% cheaper and their pigs up to 25% to 50% cheaper. Thus, record profits are not surprising.

Darrin Qualman is Executive Secretary of the National Farmers Union - www.nfu.ca. The Farm Crisis and Corporate Power is a new report by the Canadian Centre for Policy Alternatives.

Posted: April 30, 2001

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