The hog industry is experiencing more lows these days due to severe economic swings.
In fact, Saskatchewan-based Big Sky farms, North America’s number two producer, entered receivership recently. That announcement was followed the next day by Manitoba-based Puratone Corporation’s decision to file for bankruptcy protection.
For the hog industry, it will be more of the same as market conditions continue to change. Many factors, most of them foreseeable and manageable, have triggered bankruptcies in the industry over the years. These factors include fuel costs, currency fluctuations, and sudden closed-access to some markets.
In fact, Big Sky filed for bankruptcy protection and restructured its business just a few years ago after a similar run-up in feed costs. The most recent bankruptcies are evidence the industry is still incapable of systemic adaptation.
Canada is one of the most cost competitive pork producers in the world. Most swine producers in Canada are astute cost managers. Nonetheless, current business models in the industry don’t allow producers to hedge against higher feed costs. So when input costs increase, margins across key business units get much tighter.
Most of what we export is fresh or frozen, but unprocessed is where value creation and economic growth really lies.
Other business models have been successful elsewhere. Despite the relatively higher cost levels, Danish hog producers are efficient pork exporters despite abrupt economic cycles.
A harmonization of activities along the supply chain from breeding and genetics, to production, slaughter, processing, further processing, and exporting, allows the Danish hog industry to build an unparalleled competitive advantage over other countries.
Such coordination from farm to market enables the industry to tailor products to the needs of specific market segments. As a result, we buy pork from Denmark, but Denmark rarely buys from us.
After its last bankruptcy episode, Big Sky adopted a producer-centric approach and created several independent entities to accommodate production loops developed over a decade.
Most of the reasoning was decoupled from market access and responsiveness. This is a prominent marketing paradigm in Canadian agriculture.
Meanwhile, through close vertical and horizontal coordination, the Danish industry is able to decrease transaction costs, upturn efficiency, and enhance the quality of its products.
In other words, structure design of the industry is essentially based on market demand, not on the primary producers’ needs, a refreshing method.
Increased competitiveness must be based not only on enhanced economies of scale, but also on more strategic flexibility, proximity to market, and increased global focus. The Canadian hog industry exported more than $3 billion worth of products last year.
Like the Danish, some could be produced elsewhere. Production points could get close to aimed markets and logistical capacity could easily be enhanced. The Canadian hog industry committed only to building cost management efficacies in recent decades, making it vulnerable to unexpected changes in input costs.
Bankrupted companies will be expecting something from governments, and why not? Public coffers have helped the industry on several occasions in the past. Billions of dollars later, most governments have changed their views on how they want to support the hog industry, not necessarily by choice but by fiscal obligations.
Governments are out of money, plain and simple. The Canadian hog industry will have to work itself through this difficult predicament.
Higher feed costs will likely trim herd sizes over the coming months. As usual, the industry will naturally recalibrate itself based on market conditions and prices will go up again. It is a shame that all this will happen without a long-term strategy for the industry in place.
To save the hog industry in Canada, governments should leave it alone and let it figure out how to better manage and mitigate systemic risks – or else it will continue its journey toward a slow and certain demise.
Dr. Sylvain Charlebois is associate dean of the College of Management and Economics at the University of Guelph.Source: www.troymedia.com.
