As we close the books on 2015 it is always good to review. Then I will attempt the “fool’s errand” of what 2016 may hold, writes Bob Fraser – Sales & Service, Genesus Ontario.
First the review:
At the start of 2015 the industry was coming off the euphoria of the “Year of the Pig Farmer” with 2014 margins being beyond even the wildest of dreams. The thought probably was somewhat “no good deed goes unpunished”. So there would be some payback in 2015. I highlighted this in my commentary at the start of 2015 with this observation.
“I believe this has been perhaps the main governor on expansion in Canada. It would be nice to suggest the reason for our lack of expansion is greater discipline and foresight. However the reasons appear to be twofold. One the Canadian industry due to host of factors was more beat up in the last ten years, suffering considerably great losses. Therefore they have taken longer to heal up. This coupled with the significant question of where you’re going to get your extra hogs slaughtered is more than ample reason for caution within the Canadian industry.
Traditionally shipment of market hogs and particularly SEWs and feeder pigs to the US have been a viable option to Canadian producers. This has been greatly befuddled by COOL and although we’re constantly told, “we’re winning on this”, “we’ve won” etc. appears to still be a slow boat to build plans on.”
So although as they say this observation wasn’t “rocket science”, I still give myself an “A”. We haven’t seen any expansion in Canada (Ontario) in the past year and for any that thought shackle space wasn’t important they got a rude wake up call on March 24, 2015. The Olymel plant at Vallée-Jonction went on strike March 18. “To limit the adverse consequences for Quebec producers” March 24th Olymel cancelled deliveries for all 23,000 hogs from Ontario. The dog was very quickly at the end of the chain with the predictable hit to margins as supply overwhelmed demand.
As you can see below from OMAFRA’s Monthly Hog Market Facts. Margins that had already started heading south in February were further exasperated with the strike only to recover in May with its settlement and the usual second quarter improvement. However the net result was a first half average margin of $4.90.
All the numbers aren’t in yet for the second half but as you can see margins have declined (as is typical) going into the fourth quarter. However this has been further pressured by an ongoing slowdown of Ontario hogs into Olymel due to cooler capacity issues at Vallée-Jonction. This has resulted in many Ontario producers with contracts into Olymel seeing their weekly flow cut in half or even worse. The options for shipping elsewhere are not great resulting usually in a “severe haircut” from differences in grade and freight.
So although on the year margins will be black it certainly has been a more than normal rollercoaster ride and the lack of adequate shackle hangs heavily over the industry. The one ray of sunlight came December 18th with the repeal by the US Senate of COOL legislation. That only took eight years!
This leads us to what 2016 may be bring. I expect with the repeal of COOL and the Canadian dollar recently hitting its lowest level in eleven years it will be “back to the future”. By that I mean will see a rapid expansion of SEWs and feeder pigs from Canada into the Midwest. This is the proverbial “easy trade” with prices on small pigs when translated into Canadian dollars offering margins that will be challenging to replicate by finishing the pigs through in Canada. Although Canadian packers can hardly be blamed for ratcheting down their offerings on spot and contracts as the lack of shackle space put them firmly in the “catbird seat”, the worm may once again be ready to turn. The coming Clemens Food Group plant in Michigan and the Triumph/Seaboard plant in Iowa will clearly change the dynamics. However that’s a good 24+ months out but the shifts from the COOL repeal may change the game by as early as this summer.
In any event, buckle up likely to be a coming all too typical wild ride that is the pig business with a few unexpected twist and turns.
Finally perhaps the best good news is we live in one of the greatest democracies in the world with the pillars of peace, freedom and the rule of law. This is no small thing and God is indeed good. Something we should be truly thankful for as we scan the globe considering other places you could be doing business in.