Ontario's feed cost competitiveness

Sunday, February 6, 2011

The corn price here surged, but not as much as in Iowa, bringing pork production costs in this province closer to in line with the Cornbelt

by Randy Duffy

The rise in feed costs during the last half of 2010 and into 2011 has the pork industry concerned. Much of the blame for the increase in corn prices is the volume of corn used in ethanol production. The latest estimate by the USDA has ethanol using 38 per cent of the 2010/2011 U.S. corn crop.

The ideal situation would be if the ethanol producers would use alternatives to corn as their feedstock source. However, this is not probably going to happen any time soon.

The latest estimate as of Dec. 31, 2010 for U.S. ethanol production shows the potential for positive operating margins for 2011 even with the currently high corn costs. Of course, the one year extension by the U.S. government of the ethanol blenders tax credit of $0.45 per gallon of ethanol (equivalent to approximately $1.26 per bushel of corn used) helps this.

A positive that has resulted from the increased ethanol production during the past few years is that the production of distillers dried grains (ddg) has greatly increased providing a feed alternative for swine producers. As a result, the Ontario price of ddg relative to corn has changed significantly and has gone from being almost 120 per cent of the corn price in 2005 to 92 per cent of the corn price in 2010.

The focus on ethanol and rising corn prices has taken the focus away from an interesting situation that has developed. With the surge in corn prices, Ontario's corn price has fallen relative to Iowa's corn price. The monthly average corn prices for December 2010 showed Huron Freight on Board at $5.20 per bushel and Iowa at $5.53. The result has been a positive shift in Ontario's hog feed costs relative to Iowa's feed costs.

Figure 1 shows estimated monthly farrow-to-finish feed costs for a market hog for Ontario and Iowa in Canadian dollars per kg of dressed pork for 2007-2010. Data used is from the OMAFRA and Iowa State monthly swine budgets. Through all of 2007 and most of 2009 and 2010, Iowa held a feed cost advantage over Ontario. Since October 2010 this has reversed with Ontario holding the advantage now. It is interesting to note that Ontario also held an advantage from the middle of 2008 until early in 2009. This occurred during a similar period of higher corn prices but at a time when the Canadian dollar was much weaker relative to the U.S. dollar than it is now.

In summary, corn and other grain prices have increased significantly in the U.S., Canada and globally causing increased costs to produce pork. The North American region will remain a low cost producer relative to the rest of the world even with the current higher feed costs. While feed costs have risen resulting in negative profit margins, it should be noted that feed costs for Ontario producers currently are very competitive relative to U.S. producers and this is happening at the same time as a strong Canadian dollar. BP

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