Cover Story

The battle is joined on single-desk selling in Ontario

Marketing will be the focus of the coming winter’s debate about the future of Ontario Pork and how hogs will be sold in this province. Will the board follow the example of its prairie counterparts and shed its monopoly single-desk powers?

by DON STONEMAN

Brant County producer Curtiss Littlejohn, the new chair of Ontario Pork, and Brian Simpson, a West Lorne farrow-to-finish and weaner producer, both claim to have the industry’s best interests at heart. Yet they are at odds over the future of single-desk selling of hogs and what Ontario Pork should be doing for producers.

Simpson says Ontario has fallen behind other provinces in terms of marketing. He believes that lower prices linked to currency fluctuations make it imperative that Ontario Pork follow through with proposals debated nearly a decade ago to get rid of the single-desk selling mechanism and remove Ontario Pork’s legal authority to act as the sole seller of hogs in the province. Simpson claims that the group he represents sells 1.5 million hogs annually in Ontario. Littlejohn disagrees.

He challenges Simpson’s assertions that producers could get more for their pigs by marketing another way. He wants to “see numbers” that prove Simpson’s points that marketing opportunities are being missed.

While there may be occasional opportunities for better prices in spot markets, “I think we can show that in Ontario, Ontario Pork gets the best value (out) of the system,” Littlejohn told Better Pork. “I would submit that Ontario Pork is a driver in the industry and is not holding anyone back,” says the feeder barn operator from Ayr.

Ontario Pork will follow its political process in dealing with the marketing issue, says its director of communications, Keith Robbins.

Dual marketing would give producers the right to sell through the pork board or to other buyers. Consultations with producers will be launched in November, culminating in a major discussion to take place at the Ontario Pork annual meeting next March in Toronto.

First, a Market Access Study and an Ipsos Reid Producer Satisfaction Survey will be completed. This is part of a consultation process that Ontario Pork calls Vision 2010. Robbins says it was already in place before the marketing issue came to the forefront.

The debate will be opened beyond hog producers, says Robbins. Breeding stock and genetics companies will also take part in the discussions, as will other pork industry suppliers and weaner operators. Including weaner producers under Ontario Pork’s checkoff has been looked at for some time, he says.

For his part, Simpson wants to see “a quick political process,” which he hopes will end up with the “freedom to market where you will.” The marketing board issued a strong recommendation 10 years ago to end single-desk selling 10 years ago, he says, noting that “in the past there has been a falling down” after the political process was completed. “We are just hopeful this group (current Ontario Pork directors) will take a progressive leadership step forward when they do get the mandate.” Simpson admits that his position in this debate is unusual for him. Normally he stays in the background on marketing issues, rather than being the spokesperson. “I’m an old dog,” says Simpson. “It’s not good to be stirring the pot all the time.”

And why is Simpson doing this? “My concern is that if we don’t get people together at one point and get a consensus and do it fairly quickly, you will see our pork industry splintering. You can regulate to a point, but if regulations aren’t followed you will have people splintering off and this will weaken the industry. We have to get everybody together.”

Prairies go private

The debate burst into the open after Ontario Pork’s annual meeting last March, when an ad hoc group of producers got together and decided to challenge the board’s selling methods.

In all three of the Prairie provinces, hog boards have shed their monopoly single-desk powers. The marketing authorities held by boards have been converted to private companies, which set their fees and compete against other private companies for farmers’ business.

Former pork board chairman Will Nap isn’t one of Simpson’s group, but he is happy to add his two cents worth to the discussion. He was chairman when the debate was at its peak and he has questions for both sides. He asks how dual marketing proponents expect to benefit from reducing Ontario Pork’s powers. “They have the opportunity to do their own price discovery under contracting,” Nap says. The marketing fee “is all that they can argue with because they are allowed to do what they want.”

Nevertheless, Nap has his issues with Ontario Pork. He thinks the board shouldn’t be in the business of scheduling when hogs will arrive at a plant. He says scheduling “is pretty messed up” while allowing that “those are strong words.”

He agrees with Curtiss Littlejohn, the current chair, that “short-term opportunities and contract opportunities may be two different things.” Nap points out that some producers have foresworn contracts in order to take advantage of better prices through the pork board’s pool. “The pool (price) is higher than contracts and Pool Plus is a little higher,” he told Better Pork in June. “Pool Plus has proved to be a pretty good marketing tool.”

Nap agrees that it is time for the pork board to revisit the task force, and cites his frustration at the time that the process of developing reports was being repeated, first by the Pork Industry Task Force and then by the Serecon Report.

In the late 1990s, the Ontario Pork Industry Marketing Task Force travelled the country and developed recommendations for marketing pork in the province. That task force recommended that dual marketing be instituted in Ontario. Then the Ontario pork board hired Serecon, a Western Canadian consulting company, to “put some numbers to it.”

Producers should remember that the report on marketing prepared by Serecon was imperfect, Nap cautions. Serecon recommended a number of marketing methods, but didn’t spell out each method’s cost. “They weren’t answering the question we (Ontario Pork’s board) were asking,” Nap says.

In late 1999, he notes, “Serecon was going to rework some figures and we were going to take them to producers in 2000” at the annual meeting. The process was shelved because of the pork-pricing crisis. Nap says it wouldn’t have been fair to producers at that time to ask them to change marketing systems when the financial stress was so high.

Lost Clout

Nap says that when the marketing debate began he was “very much a marketing board promoter. I have kind of mellowed since then,” and is he willing to consider some other options. He cites the following reasons:

• Ontario Pork dedicates resources to many things other than marketing. “The amount of time spent (by the board) looking at marketing policy is probably minimal.”
  
  
• The re-negotiation of protocols and procedures of contracting “have been relatively weak,” he says. Nap thinks the pork board lost much of its clout when the Farm Products Marketing Commission ruled contracting must be allowed. “The board probably functioned best when it was the only seller of pigs,” he observes.
  
• “I do believe that producers are best served by a single selling agency, particularly when buyers are so few.”
  
  
• “Marketing isn’t just price discovery.” It is also involves settlement to producers, including checking buyers for financial viability.

On the other hand, Nap says, “I don’t think the board should be afraid of dual marketing. It shouldn’t be afraid to lose the monopoly power.”

Nap doubts that dual marketing proponents will gain much in terms of reduced fees. Ontario Pork does much more for producers than just market hogs, he points out, and a relatively small amount of its checkoff goes strictly to marketing.

In 2005, Ontario Pork took in $10.11 million in service fees from producers. It divides its costs among a number of departments which have responsibilities that are intermingled – the Sales and Logistics Department, Business Development Department, Communications and Consumer Marketing, Information Systems, and Finance and Operational Services.

Breaking out the costs of actually marketing a hog isn’t easy, says Lloyd Bauernhuber, Ontario Pork’s director of finance and operational services. His department generates producer statements, maintains records and files on producer transactions and prices and shipment dates, and is a contact point for information on hog grading.

All the costs at Ontario Pork are consolidated in the financial statement, Bauernhuber says. The only cost that stands out is the board secretariat -- in effect, the cost of governing the marketing board. “If we attempted to allocate costs, it would be on a subjective basis,” he says. “We don’t even attempt to allocate how much of the computer system sales and marketing might use. If marketing were taken out of the mix, then the fixed costs of the building would be allocated to the rest of what Ontario Pork does and that becomes more expensive.”

Building and computer system costs are not allocated back to their departments. “Everything all together is what it costs to market a hog. If you take one part off, a body might not work as well as it should.”

Secure payment an issue

Alberta’s experience would seem to point to that. Alberta Pork embraced dual marketing in 1996, says its retiring general manager, Ed Schultz. The pork board’s marketing arm was spun off into the Western Hog Exchange (WHE).

Some farmers sell market hogs to dealers, some set up their own co-operative marketing ventures. There are five federally inspected plants in Alberta as well as a provincially-inspected abattoir system. Selling hogs in Alberta is now very complex. There are different index systems and different grading systems. Seven large producers raise one third of the hogs in Alberta, one third is raised on Hutterite colonies and another third on family farms.

The lack of a secure of payment system was “one of the big shocks” that Alberta producers faced when the single-desk agency was closed, says Schultz, who has been general manager since 1974. Within a few months of the implementation of dual marketing, a dealer went broke owing producers $1.5 million for hogs.

“That’s one thing that a single-desk seller does. We secured, through letters of credit, the buyer payment,” says Schultz. Hog sellers should ensure that they are selling to a licensed dealer. “Quite often, guys don’t do that, so it is ‘seller beware.’ The government has some new responsibilities if they are party to doing away with a single desk.”

Another issue has been speed of payment. Under the single desk, producers were paid weekly. Cheques for pigs sold early in the week were issued on Thursdays. It’s different under dual marketing. At one point, a packer was taking 28 days to pay producers and producers were unhappy. “It can get pretty exciting,” Schultz understates.

Schultz feels that costs associated with selling pigs are now higher without the single desk. Under the single-desk system, Alberta Pork charged $1.25 per hog for all of the board’s functions. With the single desk gone, the levy was reduced to $1 a hog. But WHE, which replaced the single desk, charged $1 a hog to market pigs as well, so the costs of marketing a hog have risen dramatically, and less service is provided. Ending single-desk selling is “not all good news,” Schultz says.

One of the reasons for the higher cost is that Alberta Pork made some earnings on the “float,” the money that it had in reserve at all times to cover the difference between payment to the producer and payment from the packer. The interest earned from this was applied to reduce the cost of marketing board fees.

Schultz says trucking costs are also likely higher. The single desk sold pigs to the closest packer. “Now the trucks are meeting each other on the road,” he says. Moreover, he feels smaller producers have lost bargaining power under the open system. “There is no question about that.”

And where have pig and producer numbers gone in Alberta since 1996? Then, there were 4,000 producers. The latest surveys indicate around 900 producers are left. Since 2002, sow numbers in the province have been virtually static, according to Schultz. Minimum distance separation laws make hog expansion very difficult, he says.

And why did Alberta do away with its single desk-selling mechanism? Schultz points east. “The debate started in Ontario. It caught fire here.” It’s ironic that after discussing the issue so much, Ontario decided to continue with the status quo, Schultz says.

Powerful packers adamant

Perry Mohr, Manitoba Hog Marketing’s chief executive officer, says central desk selling fell into disfavour there because of opposition from powerful packers. Mohr’s organization sells hogs, as did the former single-desk marketing board, on which he also served. Mohr says “larger integrated hog procuring companies were adamant about removing single-desk selling and they were adamant that they should be treated differently than anyone else.”

Mohr believes that Maple Leaf Foods’ location in Brandon was also linked to getting rid of the board. He advises Ontario producers to move forward slowly with change, even if they aren’t happy with the single desk. “Maybe they can have the best of both worlds without completely dismantling” the current board. “Be careful what you ask for, because you might not like what you get,” Mohr advises Ontario producers.

With two organizations in Manitoba, he feels, “there is a tremendous duplication of service. There is a tremendous cost. The industry needs to cut out those costs. With a 90-cent Canadian dollar, there ain’t a lot of extra cash around.”
He recalls that Manitoba Pork Est, the old board, “lacked a little bit of flexibility at the time.” When it started to exhibit flexibility “it was too late and “the wheels were already in motion” to get rid of the single desk.

“I believe that sometimes that power gets misused” when an organization has government legislation behind it, Mohr warns. Though he concedes that the single desk “is probably the efficient way in theory” to sell hogs, he believes that sometimes producer boards get sidetracked.

“They lost their focus and the marketing component got to be almost secondary to the universal component
(the environment and consumer issues),” Mohr says his board, which also sells weaners and procures feed grain, spends all of its time talking about marketing issues. The Manitoba Pork Council deals with “universal services.”

Pork producer Marcel Hacault is a past chair of the pork council, whose board includes representatives from the big pig companies. “When the board of the Manitoba Pork Council meets, we discuss everything but the actual marketing of hogs. Price and pricing agreements never get talked about,” Hacault says.Hacault was also a board member of the marketing board when the provincial government stripped away its monopoly marketing powers in the late 1990s. He says there was never a vote on getting rid of the single desk and the government had an agenda - to double hog production and processing capacity.

The hog production goal was easily surpassed, but increasing processing was less successful. In 1996, Manitoba raised 2.2 million hogs and processed two million. Last year, the province’s producers finished close to eight million hogs and packers processed 2.5 million in the same period. Exports to the United States grew exponentially from 100,000 hogs in 1996 to one million hogs and another three million weanlings last year.

Hacault concedes that the growth was “maybe not a result of the change in marketing.” ”Here is where we get into some grey areas,” he allows.

He says that dismantling the single desk “opened the doors for anyone who wanted to export pigs.” On the other hand, he says, the old system really didn’t impede exports and there were some exporters previous to the system’s dismantlement. “I would almost call them renegades,” Hacault said. They were producers “who weren’t happy with their options in Manitoba.”

And if there was a vote now? He thinks most Manitoba producers would now signal their contentment with how the current marketing system works.

Hacault spoke to dual marketing proponents at a meeting in Woodstock in early June. “Giving producers the option to market their own hogs directly has made the entire industry here stronger,” Simpson’s press release quotes Hacault as saying. “It has also removed a significant source of friction between the producers and the pork board.”

“They didn’t run that by me,” Hacault told Better Pork, while allowing that “I think most people would agree with that.”
Maple Leaf holds its council Brian Simpson says that the ad hoc group he represents is only one group that wants to see Ontario Pork’s powers reduced.

Bob Hunsberger of Breslau, a spokesman for the Progressive Pork Producers Co-operative (3-P), Ontario’s third largest processor, says members haven’t talked about the options available under the nearly decade-old Serecon Report since the debate re-opened. But he thinks they would be in favour of any of three options suggested by Serecon that would bring about an end to the single desk. “We believe that Ontario Pork does a lot of good things,” Hunsberger told Better Pork. But 3-P doesn’t need a lot of the things that Ontario Pork now does, including arranging for delivery of pigs to the plant and settlement. As far as settlement is concerned, “we would like to have more freedom, or total freedom in that capacity.”

3-P has the technology to settle with its own members for the pigs that they deliver to their own plant. “It’s different than it was 20-30 years ago,” Hunsberger says, “when computers occupied whole houses and cost millions. The technology has evolved so much.” Last year, 3-P strenuously fought Ontario Pork’s efforts to fund the fight against an American countervail against Canadian live hog exports.

Unlike 3-P, Maple Leaf Foods, the largest processor and Ontario’s largest single hog producer, is holding its council about Ontario Pork’s marketing powers. “Maple Leaf, especially in this era of a high Canadian dollar, is interested in any initiative that reduces costs and makes Ontario hog producers more competitive,” the company said in a written statement. “Consequently, if providing Ontario producers with an open market option allows the industry to become more competitive and build new opportunities in the long term, then we are supportive of it.”

But big is not always better, Simpson says, citing “roadblocks” that have been put in front of producers who wanted to market on their own. He points to one producer who had a contract with Maple Leaf but who had extra pigs and wanted to sell to its processor another truckload of pigs that were ready. Simpson said the pork board refused to allow that sale to take place. A few days later the packer called the producer directly, citing a shortage of pigs for its kill line.

Some farmers schedule more trucks than they will need and then cancel the pickups that aren’t convenient, leaving plants short of pigs. Ontario Pork would like to impose penalties against producers for cancelling pickups because it is an added business expense. But, he says, the Farm Products Marketing Commission (FPMC) won’t allow it.

John Fitzgerald, FPMC’s pork marketing analyst, says a marketing board can impose penalties only if it has been delegated specific powers by the commission. Ontario Pork would have to have the power to license producers in order to impose penalties, he argues. Ontario Pork is unique because it doesn’t license the production of hogs, even though it does license truckers, processors and operators of assembly yards. Licensing isn’t an easy power to grant because it affects other stakeholders in the industry, Fitzgerald says.

“Most of the irritants between producers and Ontario Pork are related to marketing,” Simpson says. His group advocates that the checkoff for Ontario Pork be extended to all swine producers. Weaner sellers are currently not covered under Ontario Pork’s mandate. As well as a farrow-to-finish operation, Simpson says he now runs an 800-sow barn with his brother and sells weaners. “We get all of the benefits of Ontario Pork and don’t pay a penny for it,” Simpson says. He’s willing to give up that exemption to push through hog marketing changes. BP