The United States is expected to import more than 8 million
hogs from Canada in 2004, a far cry from the 921,000 head imported
just 10 years ago. Moreover, unlike 1994, hog imports this year
will likely continue to be skewed in favor of feeder pigs (see Glossary
of Production Terms). Ten years ago, 44 percent of imported
Canadian hogs were feeder pigs, versus almost 70 percent in 2004,
with slaughter hogs making up the balance in each case. What economic
factors changed in the past 10 years to create the demand for Canadian
hogs, and, why has the trend developed toward feeder pigs? As with
most questions pertaining to agricultural issues these days, these
questions have no simple answers.
The rising influx of Canadian hogs has stirred up considerable
controversy in the industry. On the one hand, the National Pork
Producers' Council (NPPC), along with 19 State pork producer organizations
and more than 100 individual U.S. pork producers, argue that Canadian
hogs and feeder pigs established market share in the United States
by using illegal subsidies from the Canadian and Provincial governments
and by selling hogs and feeder pigs in the United States at less
than fair value. The group has filed formal complaints with the
U.S. Department of Commerce (DOC) and the International Trade Commission
(ITC) (see Antidumping and Countervailing Duty
Investigations Are Underway...).
Glossary
of Production Terms
Feeder pigs: A young pig
weighing between 10 and 60 pounds; such animals are
bred for finishing. The distribution of feeder pigs
imported from Canada is skewed in favor of segregated
early weaned (SEW) pigs that weigh about 10 pounds.
SEW pigs are products of a system that breeds and
farrows sows on one farm, weans the pigs relatively
early (10-18 days), and then removes the weaned pigs
to a new site, separated from the first by about a
mile, until they are about 8 weeks old. Then the pigs
are moved again to another separate site until they
are ready to be sold. Proponents of the SEW system
argue that it delivers as much as a 20-percent boost
to growth rate, provides a predictable production
system, reduces the impact of disease, and reduces
costs of production. Its detractors argue that the
system is overkill—overcapitalized and reproductively
awkward.
Finishing: The process of feeding a feeder
pig a ration of primarily corn and soybeans, usually
for a 6-month period, until it reaches slaughter weight
of between 260 and 270 pounds.
Finishing operation: A production enterprise
specialized in finishing feeder pigs. Currently, feeder
pigs are typically bought and sold under contract
arrangement, as a component in a vertically coordinated
or vertically integrated pork supply chain.
Slaughter hog: A hog of roughly 6
months of age that has achieved slaughter weight.
Farrow-to-finish: An operation that
includes all stages of production from breeding through
finishing.
Farrow: To give birth to a litter
of pigs.
Processors/Packers: Enterprises engaged in
the slaughter stage of pork production. The objective
of the slaughter stage of the U.S. pork industry is
to produce uniformly high-quality products that are
increasingly differentiated, branded, and more highly
processed than in the recent past. To achieve its
objective, the industry has adopted various new business
models, built around vertical coordination via contracting
(production and marketing), or by outright ownership
of upstream assets (vertical integration), all in
the interests of guaranteeing on-time delivery of
uniform, high-quality hogs.
On the other hand, the surge in Canadian hog exports
to the U.S. is just one manifestation of profound structural changes
that have occurred in the U.S. pork industry over the past 20 years
and a trend toward tighter integration of North American pork production.
A confluence of structural change in the U.S and significant policy
changes in Canada likely set the stage for the growth of the Canadian
hog industry and U.S. demand for hogs. In short, policy change in
Canada has created a supply of hogs in excess of Canadian slaughter
capacity, while structural change in the U.S. pork industry created
a demand for hogs—particularly feeder pigs—in excess
of domestic hog supply. Both sets of changes took place in an economic
environment highly conducive to cross-border market integration.
Many economists argue that the outcome has been a complementary
system of hog production in North America, where favorable prices
have attracted new Canadian resources to production of hogs—especially
feeder pigs—to meet U.S. processors' demand for hogs. While
these changes may well have brought hardship to some U.S. producers,
many others have prospered. Moreover, U.S. processors and consumers
have benefited from lower hog prices.
Prior to policy changes in Canada and structural change in the United
States, it was reasonable to talk about "the U.S. pork industry"
and "the Canadian pork industry" as separate, stand-alone
industries because there was so little integration between them.
But today, it is more accurate to talk about a North American pork
industry, in which significant numbers of low-cost feeder pigs are
produced in Canada, exported to U.S. Corn Belt States for finishing
on low-cost U.S. corn and soybean meal, and then slaughtered in
large, highly efficient U.S. processing facilities.
Indeed, pork production in North America is now a specialized activity
that takes place in stages, at geographical locations where relative
costs are minimized. Economists justifiably point to North American
pork production as an application of the "theory of comparative
advantage," which states that an economically efficient country
specializes in the activities that make the heaviest use of the
resources possessed by the country in greatest abundance.
Antidumping
and Countervailing Duty Investigations Are Underway
. . .
On March 5, 2004, the National Pork Producers'
Council (NPPC), along with 19 State pork producer
organizations and more than 100 individual U.S. pork
producers, filed petitions with the U.S. Department
of Commerce (DOC) and the International Trade Commission
(ITC), arguing that, in 2003, Canadian exporters of
hogs and feeder pigs established market share in the
United States by using illegal subsidies from the
Federal and Provincial governments of Canada, and
by selling slaughter hogs and feeder pigs in the United
States at less than fair value. The petition requests
trade relief in the form of antidumping and countervailing
duties, each of which, if imposed, would effectively
increase U.S. prices of feeder pigs and slaughter
hogs imported from Canada.
Investigations of the claims of the NPPC et al. are
underway at both the DOC and the ITC. The investigations
will examine financial records of individual Canadian
hog producers, as well as the structures of and disbursements
from Canadian government programs that assist agricultural
producers. The role of the DOC is to make preliminary
and final determinations on countervailing duty (CVD)
and antidumping (AD) questions. The CVD question concerns
the legality of financial support given to Canadian
hog producers by the Federal and Provincial governments
of Canada, and whether CVDs should be levied to compensate
U.S. producers for Canadian subsidy support. The AD
question concerns whether Canadian hogs were sold
in the United States at selling prices of less than
fair value in 2003, in which case, antidumping penalties
are to be assessed. The role of the ITC is to make
preliminary and final determinations as to whether
imported Canadian hogs either materially injured or
threatened material injury to the U.S. hog production
industry in 2003.
So far:
In May 2004, the ITC made a preliminary
determination that "...there is a reasonable
indication that an industry in the United States
is materially injured by reason of imports from
Canada of live swine..."”
In August 2004, the DOC announced a
negative preliminary determination in the CVD investigation,
finding that the total net subsidy to Canadian hog
producers by the Canadian Government is de minimus—that
is, negligible and thus too small to be countervailed.
In October 2004, the DOC issued a positive
preliminary determination with respect to the dumping
charge. As a result of the ruling, beginning in
late October 2004, Canadian exporters of live hogs
to the United States have been required to post
a cash deposit or a bond, equal to antidumping penalties,
or roughly 14 percent of the value of the imported
Canadian hog or feeder pig.
Final determinations from DOC on the CVD
and the AD investigations are due in early March 2005.
The ITC is to issue a final determination concerning
injury to the U.S. hog production industry in late
April 2005. If DOC makes affirmative determinations
in either the CVD or the AD investigations, and the
ITC makes an affirmative final injury determination,
countervailing duties and/or antidumping penalty orders
will be issued.
Canadian Policy Changes Create Hog Production
Opportunities
In the mid-1990s, the Canadian Government sharply
reduced its subsidies to agriculture, thereby reducing its budget
deficit and meeting its World Trade Organization (WTO) subsidy reduction
commitments. The 1995 repeal of the Western Grain Transportation
Act (WGTA), in particular, created an incentive to produce livestock
in the Western Provinces, a region historically dedicated to grain
production. The WGTA had subsidized rail transport of grain produced
in the Western Provinces to Atlantic and Pacific export points.
Absent these subsidies, feeding wheat and barley to livestock—particularly
hogs—became more profitable than shipping the grain for export.
Consequently, inventories of hogs and pigs in Manitoba—a Western
Province—increased over 78 percent between 1995 and 2004.
Manitoba's breeding herd increased more than 105 percent over the
same period, and the Province is now the primary source of U.S.
imports of Canadian feeder pigs.
Also contributing to the excess supply of hogs in Canada
is a lack of slaughter capacity, compared with that of the United
States. Although Canada’s slaughter and processing of hogs
has increased significantly in the past 5 years, slaughter growth
is trailing hog production. This year, Canada will slaughter and
process almost 23 million hogs, a 44-percent increase over 1995.
During the same period, hog production in Canada, as measured by
annual pig crop, increased from 21 million to 31 million hogs, or
48 percent. Canada's ratio of pigs-to-slaughter rose from 1.27 in
1995 to 1.33 in 2002, reflecting the rising share of Western Canada's
new hog production capacity dedicated specifically to raising feeder
pigs for export to the United States.
U.S. Structural Change Creates Demand for Feeder Pigs
The growing excess supply of hogs in Canada was not simply a response
to policy changes in Canada. There was also a simultaneous surge
in U.S. demand, the result of significant structural
changes in the U.S. pork industry over the last 20 years.
Until the mid-1980s, the U.S. pork industry consisted of a hog production
component comprised primarily of many small, independently owned
farrow-to-finish operations and a processing component with sufficient
year-round processing capacity to accommodate large fall-winter
slaughters. Currently, the sector is comprised of a smaller number
of larger sized hog production and hog-processing operations, each
increasingly reliant on contracting and vertical coordination to
reduce risk and optimize year-round slaughter capacity utilization.
Advancing technology and the exit of small operations from the pork
industry led to a dramatic reduction in U.S. breeding herd numbers.
From 1994 to 2003, the breeding herd of swine in the U.S. declined
by 14 percent. The breeding herds that underlie the new industry
structure are products of state-of-the-art genetic technology and
are managed aggressively—young piglets weaned at 14 days rather
than at 20+ days, for example—to control disease and to maximize
sow productivity. Relatively speaking, productivity increases in
the U.S. breeding herd have partially offset the absolute decline
in breeding herd numbers. Fewer breeding animals produce more pigs
than just 10 years ago.
While producer adoption of technological innovations have led to
productivity gains in swine breeding, probably a more important
reason for the decline of the U.S. breeding herd has been the exit
of small, independent hog operations from the industry. There
are many reasons for the exit of the farrow-to-finish operations,
but most economic research points to an aging population of hog
producers unable or unwilling to compete with large production facilities
on a cost basis and/or to meet packers' contract criteria.
More and more, U.S. hog production has become specialized in one
aspect of production. Breeding/farrowing and finishing are two examples
of specialized operations that characterize hog production today.
Accordingly, Corn Belt hog operations now are more likely than not
specialized in finishing feeder pigs on locally grown corn and soybean
meal. In turn, the packing plants increasingly contract with a small
set of large production facilities in order to ensure steady supplies
of uniform, high-quality hogs.
Lower Costs Favor U.S. Packers
The U.S. pork industry has also seen a decline in slaughter capacity
since the mid-1990s. At its peak, U.S. packers could slaughter roughly
118 million head of hogs per year. Currently, annual U.S. slaughter
capacity is closer to 103 million animals. This decline reflects
a departure from the industry's past willingness to maintain excess
capacity—that is, to underutilize facilities for almost three-quarters
of the year (January-August)—in order to accommodate large
seasonal (September-December) slaughters.
As the processing industry became dominated by new, very large slaughter
plants that maximize throughput year-round in order to lower fixed
costs, high-cost, lower capacity plants were forced to close, thus
reducing total U.S. slaughter capacity. The industry now accommodates
large fall-winter slaughters by adding a second shift and/or by
slaughtering animals on Saturdays. "Chain speeds" (the
speeds at which the animals are killed and processed into pork products)
are also accelerated during periods of high demand, increasing output
of pork. Thus, rather than holding excess capacity for periods of
high slaughter demand, the industry uses a smaller slaughter capacity
more intensively.
However, while U.S. slaughter capacity has fallen, U.S. hog production
capacity has fallen even faster. To maximize throughput, yet still
maintain capacity to accommodate heavy slaughter periods, U.S. packing
facilities bid up the price of hogs. In the open-border situation
that now characterizes U.S.-Canadian live hog trade, U.S. packers
can "outbid" Canadian packers for slaughter hogs. U.S.
packers can do so because of lower costs that derive partly from
lower U.S. wages and more flexible work rules. Work rules in the
U.S. allow Saturday slaughters and second shifts that have never
been common practice in Canada.
Exchange Rate Nets Further Discounts for U.S. Buyers
The U.S.-Canadian dollar exchange rate has been a major factor driving
U.S. demand for Canadian hogs. Between November 1996 and January
2002, the U.S. dollar appreciated almost 20 percent against the
Canadian dollar, with the Canadian dollar falling to $0.625 in January
2002. When the U.S. dollar appreciates against the Canadian dollar,
Canadian sellers "net" more Canadian dollars after converting
the U.S. dollars received from the sale of animals. Each time the
U.S. dollar appreciated against the Canadian currency between the
mid-1990s and 2002, the Canadian hog supply chain garnered an exchange
rate premium. This premium, coming just as the Canadian hog export
business was establishing commercial links in the United States,
proved a powerful marketing tool for sellers of Canadian feeder
pigs and hogs. With the help of exchange rate dynamics, Canadian
feeder pigs could become more competitive, for example, than pigs
grown in Oklahoma. U.S. hog finishers buying feeder pigs benefited
by paying lower prices for feeder pigs than might have otherwise
been the case.
The Canadian dollar began to appreciate against the U.S. dollar
in 2002, but this did not stop the flow of hogs into the U.S. The
rise in the Canadian dollar appears to have led to a decline in
the competitiveness of Canadian pork products in Asian markets,
particularly Japan, the world's largest pork importer, with U.S.
pork becoming more competitive against Canadian pork. Canadian pork
exports declined, and slaughter margins of Canadian processors decreased,
obliging them to offer lower prices for hogs. Canadian hog producers
responded by exporting more slaughter hogs to the United States.
Whichever direction the Canadian dollar goes in the future, exchange
rates will continue to affect the quantity and type of Canadian
hog (i.e., feeder pig or slaughter hog) traded in the United States.
Canadian Breeding Operations More Efficient
It was not only the strong U.S. dollar between 1996 and
2002 that contributed to the competitiveness of Canadian hogs in
U.S. markets. Perhaps even more important, the Canadian hog industry
has gained a competitive edge from breeding herd efficiencies. Official
Canadian statistics show Canadian breeding herds to be significantly
more efficient than U.S. herds, in terms of the all-important measures
of pigs per litter, and pigs per breeding animal per year. The U.S.
breeding herd has, according to USDA statistics, also become more
efficient with the exit of small, inefficient farrow-to-finish operations.
However, there remains a wide disparity between Canadian and U.S.
efficiency indicators, suggesting in stark terms why Canadian pigs
may underprice feeder pigs produced in the United States.
For example, in 1995, a Canadian breeding animal produced 1.9 more
pigs per year than a U.S. breeding animal. By 2003, that gap had
widened to 3.4 pigs per animal per year, in favor of Canada's breeding
herd. Data on pigs per litter tell the same story. Canada's breeding
herd produces 0.4 pigs per litter more than U.S. herds on farms
with more than 5,000 head, assumed to be most able to take full
advantage of scale economies. Canada's greater breeding efficiency
contributes to lower production costs, which, in combination with
favorable exchange rates, boost the competitiveness of Canadian
feeder pigs and slaughter hogs, compared with animals produced in
the United States.
Another important factor contributing to the efficiency of Canadian
breeding herds is the cool Canadian climate and lower herd densities.
Both factors serve as powerful dampers on the development and spread
of disease, the bane of every swine producer, regardless of location.
Being located farther north than the United States, Canada has a
cooler climate that is less hospitable to swine diseases. Cooler
weather also improves lactation quantity and quality in nursing
sows, thus enhancing litter health.
Moreover, the swine population density is much lower in Canada than
in the United States, particularly in Manitoba, where hog operations
are typically located many miles apart. In Iowa and southern Minnesota,
the primary destinations of most feeder pigs sold in the United
States, hog operations are often separated by just a couple hundred
yards, increasing the probability that a disease will spread to
adjoining operations. Disease outbreaks in swine herds are not unusual
events. When an outbreak occurs in operations located in Corn Belt
States, the probability of the disease spreading beyond the originating
herd is larger than if the same disease were to occur in the more
widely dispersed Canadian hog production industry.
Hog producers also point out that swine diseases are extremely difficult
to totally eradicate once they have become established. Thus, from
a disease standpoint, U.S. hog producers are at a disadvantage with
respect to Canadian hog producers simply because hogs have been
raised in U.S. Corn Belt States for more than a century, whereas
the hog industry in Western Canada is relatively new. Swine diseases
are not as significant a factor in a relatively new industry as
they are in the more established hog industry in the United States.
Market Dynamics Strengthen Integration of North American
Pork Markets
So, why does the U.S. import so many Canadian hogs? A
combination of policy change in Canada and significant industry
restructuring in the United States certainly set the stage. The
cheap Canadian dollar between 1996 and 2002 in terms of U.S. currency
likely provided a windfall to sellers of Canadian hogs in the United
States. But the key to the increase in U.S. hog imports may well
be the dynamics of events—the order and the speed at which
they occurred. Changes in structures of U.S. hog production and
processing, although not independent of each other, did not occur
as a perfectly timed and coordinated sequence of events. In order
to maximize throughput and still maintain capacity to accommodate
heavy slaughter periods, U.S. packing facilities bid up the price
of hogs. Years ago, when an individual slaughter plant bid up hog
prices, profits would have accrued only to producers located close
to the plant. Now, prices bid by packers in Iowa and Kentucky to
maintain throughput are high enough to attract producers located
as far away as Manitoba and Ontario. The lower cost base of the
U.S. slaughter industry, relative to Canada's, allows U.S. packers
to consistently bid aggressively for hogs, and thus functions as
a primary driver of U.S. live hog imports.
Pork production in North America is arguably an application of the
theory of comparative advantage. Canada mainly specializes in the
stage of pork production where it is most efficient—feeder
pig production—and the United States tends to specialize in
finishing hogs—particularly in the Corn Belt States, where
costs of corn and soybean meal are minimized—and in processing
finished hogs in large-scale processing facilities that can minimize
costs. Consumers in North America and Asia reap the benefits of
low-cost, high-quality pork products.