Better Pork - February 2007

Cover Story

Lower costs south of the border a lure to Ontario producers

Cheaper feed, drug and construction costs are persuading more Ontario operators to finish their pigs in the United States. And the attitude of American packers is more encouraging

by KATE PROCTER

Many Ontario pork producers are looking more seriously at marketing options since Maple Leaf's announcement last fall that it would be reducing processing capacity in Ontario. One option is finishing pigs in the United States, where the costs of production are lower and there are more marketing options. But there are also challenges that Ontario producers should be aware of before sending pigs south.

Phil Anwender is one Ontario producer who is finding favourable conditions in the United States for finishing pigs. Anwender, who runs a 500-head, farrow-to-finish operation near Stratford, has never sent any of his own pigs south of the border, but started buying American-produced weaners in July, 2005, and finishes the animals there. "We are doing this to mitigate the risk associated with the movement of live animals across the border and to minimize our exposure to fluctuating currencies," he explains.

Anwender deals with Propig, an American management company located in Worthington, Minn., which works in conjunction with feed mills in north-west Iowa and south-west Minnesota to find contract growers. Propig sets up a meeting between the Canadian and American producers, which is conducted much like an interview, explains Anwender. He prefers dealing with people who own the barn and do the labour themselves rather than an investor who owns the buildings but contracts the labour to someone else.

His management company checks on the growers weekly and e-mails a report back to Ontario. A digital camera also helps settle disputes by providing photographic proof if any problems arise. Propig is responsible for marketing and logistics and will assist with commodity risk management if required.

Anwender admits that there have been challenges associated with starting up this type of business. “If I had the barn, staff and health status that I have in Ontario, I would have made way more money there than here, he says. Successful pork producers there have made a killing. Average producers have done well.

However, the central United States is plagued with circovirus problems and that has hit Anwender's bottom line, especially since he is buying weaner pigs on the open market. As a result, he is planning to spend more time there to overcome some of the problems he has encountered.

On the other hand, many of the costs incurred by pork producers are lower in the United States than in Canada. As an example, producers can construct a sow barn for $1,600 per sow. This figure includes the site, the barn - everything, says Anwender. Ontario producers would find it difficult just to build a barn for that price.

Anwender has also noticed a big difference between the two countries in costs for drugs and feed. He compared a basket of six drugs which he commonly uses in his operation, including Sow Bac CE II, Farrowsure-Plus B, Ferroforte, Lutalyse, Pro-Banminth and Suvaxyn MH-One. In Ontario, the total cost per pig marketed works out to $1.92 Cdn. In the United States, the same basket of drugs works out to about $0.96 Cdn.

Mycoplasma vaccines are the single biggest culprits when comparing price differences, notes Anwender. A committee from the Perth County Pork Producers, of which Anwender is president, took their findings to the Canadian Animal Health Institute to try and determine why there was such a difference in drug prices, which can range from a 44 per cent to 242 per cent higher in Canada.

The group was told that there are a couple of reasons for higher Canadian prices. First, the market is considerably smaller and the costs of getting medications approved in Canada are spread over a smaller number of producers. Second, the regulatory system in Canada is also much more stringent than in the United States. It takes longer to get through the process and, by the time the drugs are approved, often it is close to the expiry date of the patent. This makes it more difficult for the drug companies to get back the money invested in research and development.

However, Anwender cautions that it is not always easy to compare prices between Canadian and American producers. There are substantial differences within Ontario between what producers pay for medications. One veterinarian had a 15 to 25 per cent difference in mark-up between clients for Mycoplasma vaccine. Smaller producers tend to pay more per dose than larger producers and there are big differences between products, he says. In one group of five producers, there was a 12 per cent difference between what they paid for circovirus vaccine.

Full management service
For the past year, Walter and Martha Bosch, who run a 700-sow, farrow-to-finish operation near Moncton, Ont., have been sending half of their weaners to be finished in the United States. The Bosches work with a management company that connects them with U.S. producers who want to contract-finish pigs, while retaining ownership of the animals and paying the bills associated with feeding them.

The Bosches pay the company $2.90 US per pig. In return, the company provides “full management service, including weekly visits to the barn and e-mailed reports back to the Bosches, forward booking of inputs, forward sales of hogs to the packer and barn closeout information. The management company is also responsible for finding a suitable producer to grow the pigs.

Walter is very happy with the arrangement so far and has sent almost 9,000 animals south since they started. With the impending Maple Leaf shut-down, it gives us a market for our hogs, he says.

He hesitates to make a direct dollar comparison between the two countries, because the health status of the finishing pigs in the United States has been quite a bit different than those in Ontario and he was still waiting for final closeout information on two groups. They had a substantial circovirus problem in pigs finished in the United States, but have now started vaccinating the animals before they go.

While Walter agrees that U.S. costs of production are substantially lower than in Canada, there are costs associated with getting the pigs there and raising them that he does not incur with the animals he keeps in Ontario. Everybody does this at a price, he says. Government veterinarians on both sides of the border must certify that the pigs are fit to export, plus a brokerage firm facilitates the crossing and there is also the cost of trucking the animals.

Walter also feels that the added costs, including those of the management company, are offset by lower feed and drug costs in the United States. In order to make more money than he makes finishing pigs here, he must be paid more by the American packers and, most of the time, he is.

One big difference is the attitude of the American packers. "They want your pigs", he says. We have not had that sense from Ontario packers for a long time. In Ontario, the packers give the impression that they are doing producers a favour when they buy their hogs.

While it is important that producers pay attention to cost of production, marketing also has a big impact on the bottom line. Anwender says American packers seem to develop a more personal relationship with producers than Canadian packers do. "The majority of processors there want to deal directly with producers", he says.

They measure the level of producer commitment to them and pay attention to the quality of animals sent. If you send them junk, they will remember that. It is about more than just a grade sheet, Anwender says. Producers also have more choice and some will send to three different packers on the same day.

The link between processor and producer is closer, Anwender adds. If they need pigs, processors will call. The American processors are also more aware of genetic packages and name recognition of breeding companies is a big thing down there, he says.

Arnold Frey, one three owners of RFW Farms Inc., near Elora, also finishes pigs on contract in the United States. "I wish I had been producing there for the past three to four years. I actually believe the grass is greener," he says.

Marketing differences
Having said that, there are some factors to consider before jumping into production in the United States, cautions Frey. Americans think differently than Canadians. For one thing, they are more litigious, he says.

Bosch has also had to learn the differences between doing business in the United States and in Canada. American processors use a 74 per cent dressing percentage, he notes. Canadian producers also have to keep conversion factors in mind for both weights and currency. "You have to keep your eyes and ears open to understand what they are talking about and why, says Bosch".

Frey also cautions that it is important to know who is looking after the pigs in the United States and he predicts that it will not be long before Mexican labour in the US will completely replace Americans in caring for animals. "Can you communicate with the actual person looking after your animals?" he asks.

It is also important to keep in mind that marketing is different, says Frey. There is no such thing as Ontario Pork and producers must do the marketing themselves. Anwender sees this in a positive way, believing that it makes producers more accountable for what they are sending to market.

Finally, Frey points out that change is constant. Advantages that are present today may disappear tomorrow, especially as conditions around the world change. If there is the political will to subsidize alternative fuel production, the situation could change radically if corn prices climb.

Producers must also keep in mind that being a top-notch producer, whether in Canada or the United States, is vital to being successful. He maintains that there is more difference between the top and bottom producers in Ontario than the average advantage of the United States over Canada.

Overall, Anwender is far more optimistic about conditions in the United States than in Canada, especially for the next three or four years. "The margins that the Ontario pork industry wants are not sustainable in my business plan. The feed manufacturers, grain handlers, genetic companies and pharmaceutical companies need a reality check. I am not going to watch my equity erode so they can maintain theirs," he concludes.
BP