How do Ontario hog prices compare to the U.S.?

Monday, December 5, 2011

Comparison of close to a year's data suggests that Ontario producers in 2011 do have price equivalency with U.S. producers

by RANDY DUFFY

Ontario's hog supply, relative to processing demand, has changed significantly over time. Ontario has shifted from a region producing many more hogs than were processed within the province to today's situation where hog production is much more in balance with processing. In 2011, Ontario processors have found that they have had to pay more to procure hogs.

The discussion as to whether Ontario hog producers have price equivalency with the United States has been going on for a long time. Historically, the comparison of Ontario prices with U.S. prices has not been straightforward.

Ontario processors compensate producers based on their individual grading grids, indexes, premiums, discounts, adjustments to the 100% Formula Price, and freight through FOB yard pricing. If Ontario producers have price equivalency with the United States, then after all of these adjustments by Ontario processors, the total value received by producers should be similar to U.S. producers.

In the past, this was hard to calculate as each processor provided a different package of grids and premiums. Depending on Ontario's hog supply and demand situation, the 100% Formula Price was also adjusted up or down by processors. Recently, for example, some producer contracts have been in the range of 101 per cent -103 per cent of the Formula Price.

Since December 2010, Ontario has been reporting a weekly Average Price Total Value per 100 kilograms dressed weight that includes all premiums and discounts and is considered an "all in" value. There is now almost a year's worth of weekly data that can be used to make a more direct comparison between prices that producers are receiving in Ontario relative to U.S. prices.

Ontario uses the CME Constructed 201 Price (or C201) as a U.S. reference price. The C201 Price is a net U.S. price which includes all premiums and discounts and is also considered an "all in" value. By converting this C201 U.S. reference price to a Canadian equivalent price by adjusting for exchange rate, weight differences (pounds to kilograms) and dressing percentage differences (74 per cent in the United States, 80 per cent in Canada) we can compare the U.S. "all in" value to the Ontario "all in" value.

However, there should be some caution noted when doing Canada-U.S. price comparisons using the industry standards for dressing percentages and the exchange rate, as these will vary at the individual producer level.

Figure 1 shows the weekly Ontario Average Price Total Value (red line) and the U.S. C201 Price (blue line) in Canadian dollars per 100 kilograms dressed weight between December 2010 and October 2011.

The Ontario price has averaged $180.65 while the U.S. C201 price has averaged $178.14. That's a difference of $2.51 with the Ontario price being higher 83 per cent of the time. This difference is similar to an adjusted basis used in the grain markets and reflects the true local supply and demand conditions in Ontario with the impact of exchange rate differences removed.

To make this comparison even more accurate, it should be noted that Ontario prices are FOB yard, meaning that processors also pay additional freight of $2.25-$2.50 per hog. Although this analysis is for less than a year, it provides an estimated benchmark and highlights the current market conditions. It does appear that Ontario producers in 2011 do have price equivalency with U.S. producers. BP

Randy Duffy is Research Associate at the University of Guelph, Ridgetown Campus.