Better Pork - August/September 2002
BEHIND THE LINES
by ROBERT IRWINOne might think that downtown Toronto is a lousy place to process pork. Look at Quality Meat Packers and think again.
The family-owned company recently added nearly $300,000 in state-of-the-art modifications to their downtown packing plant. Every pig can be identified and linked to its owner and how it was raised. At some point in the future, this information will be used to price hogs according to the value that they give to consumers.
And, furthermore, Quality knows that it is competitive with other packing plants.
Quality takes part in an economic benchmarking exercise performed by Agrimetrics Associates Inc., located in Chester, Va. In the most recent study, Quality Meat Packers compared its costs with Bryan Foods in West Point Missouri, an Excel plant in Illinois, Hormel, three IBP plants, Premium Standard Farms, Lundy Packing, as well as Maple Leaf, Olymel and Brochu. Quality is more than holding its own, says general manager and vice-president Don Collis.
Agrimetrics has been providing comparative data and management information to food producers, processors and marketers since 1965, starting with the broiler industry, and describes itself this way on its website: "Agrimetrics can audit, define and compare any aspect of a company's operation that can be standardized and quantified without revealing proprietary information.
"Using our reports, management can see its company's ranking, its deviation from the better performers in the industry, and the economic potentials of all major components of production and marketing. In other words, our programs help their participants pinpoint the factors that determine profits or losses."
Virginia Business magazine quotes Agrimetrics Chairman Sidney E. Brown as saying "We've been in the information age for 30 years. Now we're in the age of analysis. Participating companies need to be able to extract the most meaningful statistics and see how they compare with their peers." That statement says a lot about where the pork industry has been and where it is going.
In another story we looked at how Ontario Pork, which acts as a producer representative to government, and is funded by farmers, helps them when they get into wranglings over barn building or charges of causing pollution, something that happens all too often lately. The case of Napanee-based Hay Bay Genetics convicted last winter of violating federal fisheries is an example. The Davis family, which owns Hay Bay, was not happy with the assistance received from Ontario Pork during a nearly three-year-long court case. For its part, Ontario Pork makes it plain that while it will try to help in a number of ways in cases that set precedents for other pork farms, the producer must still fight his or her own battle. Those who have followed Better Pork from our beginnings will be familiar with Steve Marbery's regular reports on the industry in the United States. Steve, who has written regularly for Feedstuffs magazine and who wrote for Farm & Country for many years, is missing from the pages of Better Pork this month. He's fighting a battle with cancer. We wish Steve and his family well. Our thoughts and prayers are with them.BP
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U.S. country-of-origin labelling threatens Canadian weanling industry with catastrophe
Both Canadian producer organizations and the U.S. meat industry have forcefully opposed the new rules, fearing increased costs up the supply chain. Some wonder whether the legislation will survive, but others are doubtful that it can be stoppedby SUSAN MANN
In a little more than two years, legislation in the United States is scheduled to come into force requiring country-of-origin labelling on meat sold in retail stores. This will have a major impact on Canada's pork industry, which is heavily dependent on sales of meat and live animals to the United States.Under the new rules, meat bearing the Product of USA stamp must be processed from animals born and raised in the United States. For the meat industries that have integrated North American wide over the past decades, this comes as a tremendous shock.
Canada exports more than 300,000 tonnes of pork a year to the United States, worth a little more than $1 billion Cdn. While meat sold into the food service industry is exempt, a large percentage of the Canadian pork is sold through retail stores and must be identified.
Even more at issue is the sale of live pigs. About 20 to 30 per cent of the pigs born in Ontario go to the United States, either as early weans or 25 kg feeder pigs. In all, Canada ships four million feeder pigs to the United States annually. There is no adequate feeder capacity to handle these pigs if they have to be finished in Canada, says Martin Rice, executive director of the Canadian Pork Council. If they were to be finished in Canada, another 77,000 a week would be directed towards Canadian packing plants.
The implications are so widespread on both sides of the border that many Canadian industry officials are wondering if the country-of-origin legislation, passed this spring as part of the U.S. Farm Bill, will survive in its current form. Al Mussell, senior research associate at the George Morris Centre in Guelph, has spoken to credible sources in the United States who think the legislation will die "just because it's stupid legislation that's logistically untenable." There's also the possibility of Canada launching a trade challenge.
Some industry officials and observers believe labelling, which is voluntary for the first two years, will either remain voluntary or won't survive at all. Says Janet Honey, manager of market analysis and statistics for Manitoba Agriculture and Food, "I've got a feeling that, because there's so much adverse reaction from various groups in the United States, they may decide that's it's going to continue to be voluntary and not enforce it."
However, Greg Howard, chief operating officer for Lucan-based Premium Pork, which ships 750,000 weaners a year to the United States for finishing, says U.S. packers Premium works with are looking at "it as an advantage with respect to their marketing program." He doesn't actually anticipating it surviving. But if it does, "as far as the Canadian reputation is concerned in the pork industry, we're saying 'great.' We'd love to have our pork labelled Canadian."
$1 billion a year in extra costs
The new U.S. Farm Bill gives the U.S. Department of Agriculture two years to implement new labelling requirements, which also apply to fish and produce sold in retail stores. Only meat from livestock that's born, raised and processed in the United States can be labelled as "Product of USA."
Hogs would have to be slaughtered seperately and pork would have to be segregated through to the retail meat case. Weaners born in Canada but finished in the United States (such as Premium Pork's production) would also have to be kept separate in American packing plants.
In May, U.S. Agriculture Secretary Ann M. Veneman admitted to reporters that the new law would be difficult to administer. That statement has given some Canadian pork officials hope, even though Veneman took back her statement within the week. But Kirk Ferrell, vice-president of public policy for the U.S. National Pork Producers Council, believes the legislation will still be implemented. "There's no reason to think that it will not survive. The administration will have the final rules issued by September 30 (2002). It's going to go forward. There's no stopping it at this point."
Throughout the Farm Bill debate, the pork producers council and the U.S. meat industry have strongly opposed country-of-origin meat labelling legislation because they don't believe the bill will contribute to raising hog prices. "In fact it will just do the opposite," says Ferrell. "We believe that adding additional costs to production and processing will only lower the prices that producers get for their animals."
Patrick Boyle, president of the American Meat Institute, says the U.S. livestock, red meat and supermarket industries will face $1 billion U.S. annually in additional costs because of country-of-origin labelling legislation.
If the legislation survives, as Ferrell believes it will, the George Morris Centre's Mussell says that will be very bad news for Canada. Additional costs for U.S. packers will mean they'll pay less for market hogs. And it's possible that some American processing plants taking hogs for slaughter and farms and Canadian feeder pigs for finishing may not accept animals from this country anymore because they don't want the hassles and extra costs of segregating those hogs.
For weanling pigs, Mussell says "I think this is absolutely a catastrophe. There would be some kind of a hit on the basis of these pigs because there are real costs up through the supply chain... It's going to really hurt some people financially. How long that's going to last, I don't know."
It is possible that the Canadian industry could devise a co-ordinated strategy to sell only premium product to the United States, and that the scheme to protect domestic producers will backfire. "But then could you get the U.S. consumer to go out and actively seek meat products that are marked 'Product of Canada?'" Mussell asks. "We might be able to do that but, my gosh, we're going to have a bloodbath between now and then."
The Canadian Pork Council supports the federal government in its opposition to the Farm Bill. It's also looking to Ottawa to co-ordinate Canadian livestock, meat, fish and horticultural interests (all of which are affected) in studying ways to oppose the bill, including possible challenges through the World Trade Organization or North American Free Trade Agreement. "We'll also be looking to collaborate where we can with U.S. parties that are opposed to this," says Martin Rice, executive director. These include all the major livestock and meat groups in the United States, the retail sector, the packer sector and our counterpart the National Pork Producers Council."
Rice says the legislation is already having an impact on feeder pig sales. The uncertainty about the regulatory hurdles and costs of shipping feeder pigs to the United States has led some U.S. packers and feeders to say they're not sure how much longer they'll be able to buy Canadian animals. "Any investment in new barns is being reconsidered, according to sources in Manitoba," Rice says.
Ontario Pork chair Clare Schlegel says Ontario Pork is putting its full support behind the Canadian Pork Council to pursue a challenge to the legislation. But does he think the legislation will survive? "In spite of the tremendous lobby (against the bill) in the United States, it has made it this far," Schlegel says. "It's already made it farther than anyone thought it would."
Disease outbreak threat
The U.S. country of origin labelling legislation is just one challenge facing the hog industry over the next three years and, say many industry officials, not even the major one. An even more pressing issue for the Canadian Pork Council is the need for Canada to implement zoning/regionalization arrangements so this country isn't cut off from all of its export markets if there is an animal disease outbreak here, Rice says. "That may be the single most important thing that we have to work on."
The industry would be devastated, he says, if there was an animal disease outbreak and zoning arrangements weren't in place. "We would find ourselves with twice as much pork and twice as much beef as we could consume in Canada and we would not be able to export it."
Zoning/regionalization arrangements would enable Canada to ensure that a portion of the country was disease-free and that there were protective measures to prevent that area from becoming infected. Having these arrangements in place and accepted by other countries would ensure that exports could continue from the disease-free areas. Work on this area has just started.
"We're the only major pork-producing nation in the world that has not had a major foreign animal disease outbreak in the last quarter century," Rice notes. "We'd like to keep it that way." Schlegel says the major challenge "is related to the image of pork producers, particularly with respect to the environment." In particular, it's hog farmers' ability to convince their local communities and Canadian citizens that they are an attribute locally and either neutral or positive for the environment.
John Alderman, vice-president of farming operations for Thamesville-based Cold Springs Farm Public, sees public perception of pork production as a major challenge for the industry. That includes the attitudes to hog production of farmers in rural areas as well as those of non-farmers. "Fear and fantasy," he says, are playing a part in the passage of municipal bylaws used to regulate farm businesses and there are farmers who aren't pork producers sitting on some of the councils that pass the bylaws.
Many of the bylaws and rules don't make sense from an agronomic point of view. For example, some municipalities have a rule limiting liquid manure spreading to 2,000 gallons of liquid manure at one time. "Why is that number picked?" he asks. "It doesn't make any sense. It's a fraction of what a crop needs to grow." There are a multitude of rules like that, he adds, which halt modernization of the hog industry.
However, U.S. country-of-origin labelling legislation won't affect Cold Springs' hog business much because it finishes most of its own pigs -- about 3,000 a week. "Exports to the United States are a small portion of the live side of our business," he says. But Cold Springs exports turkey pullets and that side of the business could be affected.
For John de Bruyn, who finishes pigs from 300 sows in Oxford County, the key challenge is the number of weaners being exported to the United States from Canada. "The United States is taking notice of that. It's in every commentary that comes out of there lately. I think that might become a bigger issue sooner than country-of-origin labelling."
Jim Pickard, district manager with Farm Credit Corporation, says there are three main challenges -- environmental, marketing and U.S. trade policies. "If the industry continues to grow at the current pace, I can see marketing becoming more of an issue because we lack packer facilities here," he says, adding that this is an impending problem while the environmental challenges are here now. BP
Packers remain mostly optimistic, despite industry concerns
Quality Meat Packers is far from the biggest player on the block in Ontario. But size isn't everything, downtown Toronto is a good place to process pork in spite of apparent disadvantages, and the privately-held company plans to be part of the pork packing scene in Canada for a long time, says Don Collis, Quality's vice-president and general manager.Quality slaughters a minimum of 25,000 pigs a week. That's not nearly as many as Maple Leaf Foods, which kills 125,000 at its various plants in Canada, but Quality's purchases still represent a considerable percentage of Ontario's production.
Normal daily slaughter at Quality is 5,000 pigs, but that can be "ratcheted" up to 6,000 if necessary. If a Saturday slaughter were added, total capacity would be about 33,000 in six days. "We are budgeted for 1.35 million this year," Collis says. "We will probably go to 1.4 million."
Quality exports fresh chill pork weekly to Japan. Sales are steady 52 weeks of the year because of "long-term relationships." And Quality is also a large supplier for Sobeys Stores, which feeds into National Grocers and is the sole manufacturer for A&P and Dominion stores, supplying their Master Choice Perfect Pork brand. "We work very closely with that group to try to drive their meat counter," Collis says. "Quality's whole philosophy is to create mutually beneficial long-term relationships."
The same philosophy applies to Quality's suppliers, which number about 530 producers on contract. "We have people who have been supplying us for more than nine years," Collis says.
Recently, Quality invested more than $280,000 in a Kill Floor Data Collection System, which Collis believes is unique in Canada. Alex Abreu, Quality's production supervisor, explains that there are four inspection stations linked with computers. Carcass inspections are recorded, as are yield and grade data for each animal, providing a complete inspection and grading record of each animal. The system also offers advantages to the producer in terms of detailed feedback on carcass characteristics.
The electronic scanning "gives each pig a name," Abreu says. In the long-term, a databank of information on each producer's pigs will be developed. As more information is gathered, the relationship between yield and grade, and between performance and health status, is determined. The information that goes back to the producer can be acted upon, Abreu says.
So what sort of information will be provided? Information such as a "cooler shrink" for each hog; what it means to the producer and the packer if the health status of a pig isn't as good as that of others; trends in organ recovery, carcass shrink and meat colour. This will all have an impact on how much producers get for their pigs, Collis says.
For the Progressive Pork Producer's Cooperative (PPP), which levered production at the newly expanded Conestoga Meats plant in Breslau up to 7,500 pigs a week in late June, 2002, "this should have been an ideal time to start into the slaughtering business," says Doug McLeod of Tavistock, a director of the co-op, which has more than 170 members. The cloud on the market is the Russian boycott of American chicken, (health reasons have been cited) which backed up meat protein into the United States market and depressed pork prices. Added to this are reports of increased hog numbers in North America.
In spite of these unsettling reports, McLeod doesn't anticipate a market disaster such as that of 1998. "I don't think there are as many hogs out there (as in 1998), and we are geared to handle" the additional production. Still, he admits that "the markets are an extra challenge." At least in 1998 meat prices stayed up, offering some returns for those in the slaughter business. Still, he doesn't think that pig prices will go below $1 a kg and he hopes that they won't go below $1.20.
McLeod predicts that the Breslau plant throughput will reach 12,500 hogs a week sometime in early 2003. Finding, training and keeping labour remains a major restraint.
On the nutrient management side, McLeod thinks that larger farms have the advantage. Professional companies spreading manure can haul from farm to farm without spilling, an advantage for larger operations. He can't help but make a comparison between Denmark and Canada. Denmark with a much smaller landbase, produces about as many pigs as Ontario does.
So, was 2002 a good time to open a packing plant? . "Only time will tell," McLeod says. BP
Strong rural work ethic
At the West Perth packing plant in Mitchell, the first full week of production began in early July. West Perth is a joint venture owned by Miriam Terpstra of Brussels and Larry and Glenn Tulpin, who run St. Williams-based Norfolk Packers. All hogs are coming from Acre-T Farms, owned by Joe and Miriam Terpstra and family.Ron Wareing, West Perth's General Manager, predicts that the plant will "ramp up" to 1,200 hogs a day by September. State-of-the-art equipment includes a vertical scalding system that uses one-tenth of the normal water requirements, a CO2 stunning unit with a moving wall that is animal welfare-friendly (no electric prods are necessary to move pigs) and an ergonomic eviscerating line that benefits workers.
The West Perth plant, which has 25 workers, is in a good position to take advantage of a rural-based work force with a strong work ethic. "We are adding on as we feel comfortable," Wareing says." And Acre-T is growing as well."
Wareing, who has 20 experience in the auto industry, admits that he "isn't a farmer," but recently bought a farm and is building an Acre-T barn. He describes the Acre-T operation as "a well-thought-out plan that lets newcomers get into the pork industry."
The chicken situation in the United States, which is on the mind of PPP director Doug McLeod, doesn't bother Wareing. "That is expected to be a short-term situation," he says. "Pork prices are edging up slowly now."
For over a month, Better Pork made numerous attempts to interview officials at pork processing giant Maple Leaf Foods Limited for this story. Our calls were referred to Maple Leaf's Toronto-based public relations firm, Fleishman-Hillard Inc. Finally, as press time approached, a Fleishman-Hillard staffer said that no one was available to be interviewed.
However, a few days later a press report from Manitoba said that Maple Leaf Foods was "considering" adding a second shift to its plant in Brandon, Mb, which slaughters 1,250 pigs an hour. Maple Leaf must first deal with environmental concerns. The plant now has only enough wastewater capacity to handle one shift. The report mentions Maple Leaf's difficulty in finding labour and enough pigs to supply the plant. Workers were brought in from Mexico at the beginning of the year to work at the plant. BP
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Better Pork - August/September 2002What level of security or risk are you comfortable with?
When profit in the hog business is similar to the average for small-cap industries, new entrants will come in and the business will expand... the challenge is to reduce the volatility
by RICHARD SMELSKI
Do you want a higher return or security on your investment?The fact is that you cannot have both. Let us review the market for the period 1921 to 1991 in terms of returns and risks.
If one invested in treasury bills, the average return in that period was 3.9 per cent with a 3.4 per cent variation.
Bonds would have brought 5.6 per cent with an 8.5 per cent variation, common stock 12.4 per cent with a 21 per cent variation, while small-cap business returned 17.5 per cent with a whopping 35 per cent variation.
As one invested in higher risk ventures, the return was higher but so was the variation in the return. Otherwise, one could put money in the bank and receive a standard interest rate or invest it into a small-cap business like pork production and receive a higher return if the business can withstand the price and production cycles.
Not everyone can cope with risk or deal with the accompanying stresses. However, there are many who believe they have a competitive advantage, be it through land, management skill or market access, and decide to pursue the higher returns.
At the same time, the marketplace is not static and management skill requirements change. For example, legislation or commodity regulations will try to minimize risk and still maintain a reasonable return sufficient to encourage expansion. Production requirements relative to welfare, environment and safety will increase costs. In spite of the changing scenarios, the economic principles stay the same.
In the last seven years (including 1998 and 1999), one could have locked into a contract (fixed, low risk) return or built the same barn but owned the animals in the barn (higher return and higher risk). With an average market price in this time period of $1.60/kg, the return on investment for contracting would have been approximately 12 per cent (risk and return varies with the contract detail). Or one could have owned the barn and pigs and had an approximately 17. 5 per cent return with the obvious risks of management and variation. (Land ownership is excluded in this scenario.) Each one of these options has a different return. But as your return increases, so does your risk for that return.
If one takes the average market price of hogs in the last seven years, it is basically the cost of production to enter the business (excluding the dilemma of land ownership). When there is a profit in a small-cap business like hog production, capital enters the business and continues to expand until there are losses. Then bankruptcy takes place and the industry retracts again. With an average return in the hog business in the last two years similar to small caps (greater than17 per cent), we can anticipate new entrants and an expansion in the pig business. The challenge is to reduce the variation of the small cap return (+/-35 per cent).
This variation is especially risky if production variation is multiplied into the price variation. One can often withstand price variation, but if production varies in the same period due to disease, capacity utilization and labour then one becomes especially vulnerable in these market cycles.
There are many industry studies determining the averages or benchmarks in the industry. For example, small cap return is 17 per cent, average pis/sow/year is 20, average carcass weight is 90 kg, average sex by couples is 2.3 times per week, and so on. However, the true entrepreneurs will say, "I really don't care about the average -- it's what I expect and what is my variation".
The average or the benchmark is nice, but the truth lies in one's own business plan. BP
Richard Smelski is a hog technical services manager for Agribrands Purina and a former Ontario government swine specialist
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