Better Pork - December 2006

Cover Story

Planned sale of Maple Leaf’s Burlington plant sends tremors through the Ontario pork industry

Who, if anyone, will buy the plant, which presently slaughters half the pigs killed in Ontario? And how will the industry respond to the profound changes its closing will bring in its wake?

by DON STONEMAN

In three years, if Chief Executive Officer Michael McCain’s plan carries through, the Maple Leaf flag won’t be flying over Ontario’s pork industry anymore.

Maple Leaf, Canada’s largest pork packer, will bail out of the Ontario industry as soon as it can find a buyer for its plant in Burlington as part of a strategy to return the food company to profitability.

The industry is watching closely. “It’s too early to see how this thing will unfold,” says Don Collis, vice-president of Quality Meats in Toronto, Ontario’s number two pork processor.

“We have started to look at the ramifications in detail” of the plant closing versus the plant selling to another buyer, says Curtiss Littlejohn, the chairman of Ontario Pork. “We will be keeping our ear to the ground to see if we can pick up some business,” adds Bob Hunsberger of Breslau, a director of Progressive Pork Producers (3-P) co-op, which kills pigs for its own members at Conestoga Packers east of Kitchener.

Maple Leaf plans to cut its hog slaughter nationwide to between four and five million head a year from seven million, killing all of them at its flagship plant in Brandon, Man. Nearly all of the pigs Maple Leaf raises and buys will be sourced in Manitoba. Plans to build a new plant in Saskatoon have been scrapped.

Other Maple Leaf plants across Canada will be sold off. McCain asserts that the Brandon plant will be operating at full double-shift capacity by late 2009.

Maple Leaf will also drastically alter it’s much vaunted “raising pigs the Canadian way” production model and give up most of its clear lead as the nation’s largest sow owner and biggest pig raiser. Rather than being partial owner (with full control over management) of 125,000 sows, Maple Leaf will divest its interests in some barns and complete purchase of others so that it only has full ownership of barns holding 50,000 sows. Those sows will produce about 20 to 25 per cent of the pigs that Maple Leaf slaughters. “Some vertically co-ordinated models in the United States have done very well,” McCain said when he announced the company’s strategic plan in October.

However, the company will continue to be a major hog buyer, insists Jeanette Jones, director of communications for Maple Leaf, based in Toronto. Maple Leaf has a policy of building barns in partnership with farmers, but Better Pork was not able to contact producers in Ontario who had built barns in partnership with Maple Leaf’s Elite pig raising division since 2001. McCain has promised to honour all contracts and to stay in touch with the producers the company works with.

Maple Leaf is also getting out of the retail feed business. The company will sell its Landmark and Shur-Gain brands and all the mills except for one or two in Manitoba required to feed the pigs Maple Leaf owns. In Ontario, the Shur-Gain brand, its chain of dealers and three mills in St. Marys and Stevensville, in the Niagara peninsula, will be put on the block.

The future of Maple Leaf’s investments in its key rendering division, Rothsay, remains to be determined, says Jones.

All of this will be done as Maple Leaf attempts to make its protein division profitable and recoup $100 million it counts as lost since Canada’s currency appreciated against the U.S. dollar, starting in early 2003, and when it’s pork production and marketing model began fraying.

Maple Leaf will reduce the number of pigs that it kills, cut back on the amount of pork that must be sold on volatile commodity markets and aim to produce “value-added” further processed products. Maple Leaf’s new economic model takes the company “out of direct exposure to foreign exchange” fluctuations, McCain says.

“A lot of legwork to do”

McCain says Maple Leaf’s first choice is to sell the plants that it doesn’t want. The Burlington plant kills about 45,000 hogs out of roughly 110,000 shipped by Ontario producers every week. That’s half of the pigs killed in Ontario, or perhaps more, since substantial numbers are exported to the United States and to Quebec.

Quality Meats in Toronto and Progressive Pork producers (3-P) in Breslau kill about 30,000 hogs and 10,000 hogs respectively and there are a smattering of smaller processors.

Ontario Pork has geared up to prepare a reaction to the profound changes involved with the potential loss of a large packer. “It will take a couple of months for us to even start to think how we will best react to this,” Ontario Pork chairman Littlejohn says. “There is a lot of legwork to do here.”

Just last spring, Maple Leaf surrendered its shares in a plant on Prince Edward Island, owned jointly with livestock producers, for $1, even though the provincial government had come through with loans to help support the abattoir.

The prospect of Maple Leaf simply closing the Burlington plant in three years time “paints a pretty gloomy picture,” Littlejohn says, but it’s not the only proposition.

Al Mussel, senior research associate, Senior Research Associate, George Morris Centre says the possibility that the Burlington plant might be closed shouldn’t shock producers. The plant is old and there were breakdowns on the production line, Mussel says. “Evidently they weren’t investing a lot in the Burlington facility,” Mussel says.

He points out that just last year Maple Leaf was looking at building a new plant in another location. Maple Leaf offered to buy property from the city of Hamilton in the Glanbrook industrial park for $250 million but retreated in the face of opposition by residents.

The Burlington plant doesn’t fit with Maple Leaf’s new strategy of double-shifting a high tech modern facility, says Jones. That doesn’t mean that it wouldn’t work for another pork processing company.

Littlejohn describes selling the plant to another buyer as a “middle of the road scenario.”

But Mussel believes Maple Leaf will be hard pressed to find a buyer. Would an American buyer step in? “They might,” Mussel muses. But the age of the plant and its location “make it less than highly attractive.” The plant is geographically distant from the province’s hog-producing area, while it is close to a metropolitan work force.

Speculation about an American buyer picking up the plant has been rife. Would grain trader and beef and pork packer Cargill be interested? Mark Klein, director of communications at Cargill, declined to answer any questions about potential acquisitions or divestitures or to pass a reporter on to anyone else in the organization. “We wouldn’t talk about that,” Klein told Better Pork.

Cargill already has a Canadian pork presence in Western Canada. It is the largest beef packer in Canada and is by the far the dominant packer in Ontario through its purchase just over a year ago of Better Beef in Guelph.

A spokesman for Tyson Foods Inc., based in Springdale, Ark., also declined to talk to the media also about a possible acquisition. Tyson Foods bills itself as the world’s largest processor and marketer of chicken, beef, and pork and the second-largest food company in the Fortune 500.

And then there is Smithfield Inc., the world’s largest pork producer and hog raiser, with annual sales of $11 billion US. Eight years ago Smithfield and Maple Leaf fought a pitched legal battle over J.M. Schneiders and Smithfield won. In 2003, the American company sold Schneiders back to Maple Leaf for a reported $476 million. Smithfield, through a public relations agency, also declined to be interviewed for this article.

Double shift plant lacking

Would Quality Meats rule out buying Maple Leaf’s Burlington plant? “You never rule out anything. You never know what is going to happen,” Collis told Better Pork.

In general, Mussel thinks that Canada is a cost-effective pig producer, but it simply can’t keep up with the United States on the low-margin processing side “because we don’t have a double-shifted plant.” A study by the Guelph-based George Morris Centre in 2005 concluded that double shifting a plant saved about $5 a head in processing costs because capital expenditures are spread over more throughput.

Mussel is skeptical that Maple Leaf’s Brandon plant can make the transition to a double shift because of the lack of a workforce. Brandon “is in the middle of nowhere” as far as a workforce is concerned, he says.
But CEO Michael McCain says he can make the double-shift plan work in Brandon by integrating new immigrants into the work force. McCain described the Brandon plant as “the world’s best plant with the world’s best capital investment operating at half throttle.”

He also intends to reduce costs by closing the 20-pound weight gap between a Canadian pig and an American pig. Another George Morris study, published in 1997, said that a medium-sized plant killing 30,000 hogs a week would produce an extra 24,000 kilograms of pork a week from the same number of larger hogs.

On the other hand, Mussel thinks that the exchange rate issue that Maple Leaf has offered as a reason for its losses is a “red herring.” The higher value of the Canadian dollar means that processors “are getting less for the pork, but they are paying less for the pigs” they process. The real problem, he argues, lies in the processing sector.

The future for Elite Swine in Ontario looks bleak, he believes. Maple Leaf only wants to work with assets which it owns 100 per cent. Maple Leaf owns some barns outright, and shares control of other Elite barns in Ontario with the farmer operator. “There wasn’t a lot of evidence that Elite Swine was the most efficient hog producer” in the province, Mussel says.

Elite Swine is headquartered at Cold Springs Farm’s offices in Thamesford, east of London. The pork operations of Cold Springs and Elite were merged about a year ago, with some Cold Springs employees taking over key positions.

Cold Springs describes itself as a stand-alone company 49 per cent owned by J.M. Schneiders, which acquired it in 2003. It is an integrated turkey hatchery, grower and processor as well as a pork producer. Many Cold Spring Farms employees are also shareholders in Maple Leaf Foods.

Cold Springs branded turkey is a model for what Maple Leaf’s branded further processed, value-added pork will look like, says communications director Jeannette Jones. Mussel agrees that Schneider was focusing on further processing and investing heavily in brands long before either Smithfield or Maple Leaf acquired the company.

Under financial strain

One company that likely won’t be interested in the Burlington plant is Quebec-based Olymel. It accounts for 60 per cent of Quebec’s pork production and employs 11,000 people at plants in Quebec, Ontario and Alberta. The company ships about half of its production to the United States, Japan and Australia.

It slaughters, processes and sells pork and poultry products and is expected to generate almost $2.6 billion in sales this year. The company, which earlier this year retained former Quebec premier Lucien Bouchard to help devise a restructuring plan, sells its products mainly under the Olymel, Lafleur and Flamingo brands.

For the last seven years, most Ontario producers east of Toronto have shipped their pigs to Olymel. The company has consistently increased the weight requirement for hogs, according to pork board director Marion Myers, who represents producers in district 12 in eastern Ontario.

Under the present contract with eastern producers, Olymel pays top dollar for a dressed weight between 90 and 99 kilograms. There is increasing evidence that Olymel is under financial strain in Quebec and may close plants there, so shipping additional pigs to Quebec doesn’t look like much of an option.

It’s because of the Ontario industry’s dependence upon a couple of large packers that producers formed the 3-P co-op, says Progressive Pork Producers director Bob Hunsberger. “We wanted to ensure that we had hook space.”

"If they don't think it is compatable, why would anyone else? - Bob Hunsberger

When asked if 3-P was in the market to buy the plant, Hunsberger said “I don’t think so.”
“If they don’t think it is compatible, why would anyone else?”

Hunsberger isn’t worried about possibly losing Shur-Gain feed mills. “There is lots of milling capacity in Ontario. I suppose somebody could be interested in (Shur-Gain) I don’t know who.”

Ontario Pork’s chairman Littlejohn is more positive. Because Maple Leaf is removing itself from the Ontario market and a large part of the Canadian market, that “offers a great opportunity for us to open up a world class plant in Ontario that is double-shifted.”

Littlejohn mentioned a possible partnership with another entity in a processing plant. When pressed about what such a partnership would look like, he said: “It’s kind of like saying ‘I need a new car. I don’t know what it will be yet.’”

Littlejohn said a preliminary examination of other pork marketing models around the world shows that there are many options. In the United States, he sees independent processing businesses, producer co-operatives and alliances between producers and processors. In Western Canada, Japanese interests have made investments in pork processing.

And then there is China, the world’s biggest producer, and consumer, of pork “Those folks have got a lot of money in the bank,” he says. “From everything we see, (China’s) potential to supply their own market is questionable.” Ontario Pork will be getting knowledgeable industry people to look at the situation, Littlejohn says.

Just after the Maple Leaf announcement in October, Ontario Pork board members were in Memphis, Tenn., meeting with Informa, the agricultural intelligence-gathering company, as part of a strategic planning process begun months earlier.

In the meantime, says Collis, Quality won’t be changing its strategy of developing long- term relationships with producers that supply pigs and the buyers of its pork products, both domestic and abroad. “We are recognized by our customers on our points of difference and how we approach business,” he says.
He reiterates that Ontario is still a great place to produce pork even though there are challenges, such as the effect of ethanol production on the cost of livestock production.

Meanwhile, Maple Leaf continues to spill red ink. In its third quarter of the current fiscal year, Maple Leaf Foods lost $22.3 million compared to a profit of $30.1 million a year before.

The third quarter announcement was made several weeks after the Oct. 12 news that a new restructuring plan was being put in place. BP