Second Look: Ontario pork processing: Can we compete?

Tuesday, December 2, 2008

What is the future for Maple leaf's Burlington processing plant? Will there be a buyer or will it shut down? And if it survives what will be its business model?

by KEN McEWAN

Many Ontario producers would argue today that the biggest challenge facing the pork industry is a competitive processing sector. This issue has really come to the fore with the proposed sale of the Burlington processing plant by Maple Leaf Foods, which slaughters close to 45 per cent of Ontario's weekly hog sales.

Pig production in Ontario has enjoyed tremendous success over the last decade, with production capacity increasing from 4.5 million in 1996 to 7.3 million pigs in 2006, a 62 per cent increase. However, slaughter capacity within the province has not kept pace. In 1996, 3.4 million pigs were processed in Ontario whereas, in 2006, 4.5 million animals were slaughtered here, a 32 per cent increase. In 2006, 600,000 pigs were processed in another province, 1.2 million feeder pigs exported and one million market hogs exported to the United States.

There are several issues facing the Canadian processing sector, among them:
Poor packer profitability. Most packing plants in North America operate on a business model of high volume, low margin, and compete on price. While processor margins tend to be more stable than hog prices, between 2002 and 2006 estimated producer margins were $1.75 per hog while processors lost $2.10 per hog. During this period, producers made profits in 2004 and 2005, while processors only made profits in 2002.

Strong U.S. competition. In the United States, five firms slaughter nearly 77 per cent of all hog marketings. The largest firm, Smithfield, has a commanding share of the U.S. processing market at 31 per cent, which is greater than their two closest competitors combined. This means that the business model of Ontario selling commodity pork into the U.S. market place is likely unworkable.

Plant sizing and capacity utilization. In 2006, the estimated weekly Canadian slaughter capacity was 489,000, while the United States processes approximately two million a week. In a U.S. Department of Agriculture report looking at packing plant costs, it was found that a large hog plant (one with four million head per year) could have slaughter costs by up to 25 per cent lower than a plant slaughtering one million head.

Potentially higher labour costs. Employment relations in the United States have undergone key changes since the early 1980s, when half the workers in the meat products industry were unionized. Average wages fell sharply during the '80s and union membership fell to a fifth of the workforce, where it has remained.

So the questions remain. What will happen to the Burlington plant? Will there be a buyer or will the plant be shut down? Is this plant cost competitive by North American standards? If the plant cannot be sold what will the Ontario industry look like?

The answers to these questions are very unclear. However, it is known that U.S. pork production remains commodity focused and seems to be best described by a big-small model. In this situation extremely large firms control leading positions in most markets and small companies operate on the competitive fringe trying to serve a particular market niche and compete on innovation and customer service.

Given the scale of the Burlington plant, the best business model appears to be operating on the competitive fringe and not competing directly with the large U.S. plants. BP

Ken McEwan, college professor and research co-ordinator, is an agricultural economist with the University of Guelph at the Ridgetown Campus.