Economic Snapshot of Canada's Hog and Pork Sectors

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projecting a 1.4% increase in exports of live hogs between. 2016 and 2017. Pork demand expected to remain strong. The Ca
FCC Ag Economics

Economic Snapshot of Canada’s Hog and Pork Sectors July 2017

Cash receipts for hog sector forecast to climb 12% by 2018* 6.0

5.1

CAD (billions)

5.0 4.0

3.4

3.9

3.9

4.1

2011

2012

2013

4.2

4.1

2015

2016

4.4

4.6

2017p

2018p

3.0 2.0 1.0 0.0

2010

2014

*Farm cash receipt forecasts assume an average US$0.75 CAD for 2017

FCC Ag Economics projects 2017 hog sector revenues will reach $4.4 billion at the national level, representing a 6.0% increase. They will climb a further 6.0% in 2018 to $4.6 billion.

Prices expected to drive hog revenues in 2017 Prices should drive revenue growth in 2017, as they rebound from the lows seen in the second half of 2016. At that time, tight processing capacity in the U.S. pushed North American prices down. While prices aren’t likely to reach the levels recorded in 2014 when U.S. supplies were cut short by the Porcine Epidemic Diarrhea virus (PEDv), they appear on track to exceed the 5-year average in the short-term.

Strength of production will carry revenues in 2018 Growth in Canadian hog revenues in the second half of our outlook period will likely come from an increase in production. Canadian total hog inventories have been steadily climbing since 2013. The January 2017 market hog inventory was up 1.6% from 2016 numbers, and 4.1% from 2015 numbers.

Sector highlights: next 12 months 1.  Hog revenues expected to climb 2. Higher prices and production will drive revenues 3.  Sector profitability expected to be positive 4.  Global demand for pork remains strong 5. Export opportunities expanding Hog slaughters were up 2.3% when comparing volumes between January and June 2017 to the same six months in 2016. From 2006 to 2013, the industry struggled with an appreciating loonie, increasing feed costs due to U.S. ethanol production and regulation costs due to COOL. The PEDv that wiped out 3.2% of the U.S. herd in 2013-14 created opportunity for Canadian producers to export live pigs and pork to the U.S. market. With exports of hogs having fallen by 53.0% between 2007 and 2012, the Canadian industry saw export growth of 43.2% in 2013-14. Pork exports to the U.S., Canada’s largest market, also grew by half during the PEDv crisis.

Exports of live hogs tailed off in 2015 and 2016, but are expected to again increase following an increase in U.S. processing capacity between 2017 and 2018. Some estimates put U.S. pork processing ahead by as much as 46,500 head/day by the fall of 2018, representing a potential 9.0% increase in processing capacity south of the border. If this is realized, that capacity will exceed projected growth in U.S. pork production – estimated by the USDA at 3.8% in 2017 and 3.9% in 2018. The impact of that increased capacity on the Canadian industry will likely be felt as the new demand boosts prices Canadian producers will receive. The USDA expects more opportunities for Canadian exports of feeder pigs, projecting a 1.4% increase in exports of live hogs between 2016 and 2017.

Pork demand expected to remain strong The Canadian hog and pork sectors rely on exports to remain competitive. In 2016, 70.0% of production was exported, with the U.S., Japan and China accounting for 83.6% of the total value of Canada’s exports. The world continues to eat more meat, with China expected to dominate world growth in overall volumes of pork imports for the next several years. Canada is increasing its presence as a supplier to Chinese buyers. In 2016, Canadian pork exports to China made up 15.0% of total pork exports, and were valued at a record CA$590 million. That was an annual increase of 160.0%, and may be a sign of things to come. China is now the second most important destination for Canadian pork exports when measured in tonnage. The Chinese hog herd liquidation, in which 20.0% of the world’s largest sow herd was reduced between 2013 and 2016, continues to impact the world’s trade flows of pork. With the country’s hog production severely curtailed as a result of strong feed grain prices, the continuing strength of Chinese demand for pork led to dramatic increases in imports from global suppliers. Between 2013 and 2016, Chinese imports grew from 12.0% of all traded pork in world markets to 27.0%. It’s forecast to account for 28.0% of global trade in 2017.

Positive profits into 2018 We expect hog margins to generally remain positive throughout 2017 and into 2018. Western farrow-finish operations will maintain profitability regardless of size, while the smaller operations in the east should record a little pressure on profits in late 2017 and early 2018. Current global stocks of feed grains are high relative to overall usage. Barring any unforeseen crop production issues in 2017-18, prices should remain under their 5-year average. The July WASDE estimates for 2017-18, the average corn price at US$3.30 and the average barley price at US$5.55. The weak Canadian dollar – with the average in the second half of 2017 expected to remain below US$0.78 – should support profit margins. Despite also raising feed prices, overall, hog producers benefit from a weaker loonie.

On the radar for 2017-18 •  Market access in export markets: – Implementation of the Comprehensive Economic and Trade Agreement with the European Union (CETA). – Renegotiation of the North American Free Trade Agreement (NAFTA). – Possible renewal of the Trans-Pacific Partnership (TPP) agreement, or new negotiations around market access in Asia. • Patterns in the USD/CAD exchange rate. Trends in oil prices and interest rates in Canada and the U.S. will determine the value of both currencies. • Weather patterns and potential disruptions in the supply of available feed grains. • Control of the PEDv in Canada and the U.S. as it remains present in the North American supply chain.

Learn more about the economic events that could impact our industry and your bottom line. Our team of economists and researchers share their unique perspectives in the reports, videos, blogs and articles available on our website. fcc.ca/AgEconomics

Follow the team on Twitter J.P. Gervais Martha Roberts Leigh Anderson Craig Klemmer Amy Carduner

@jpgervais @MJaneRoberts @AndersonLeigh3 @CraigKlemmer @ACarduner

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New environmental policies in China have made it difficult for small and medium-sized businesses to expand production. While pork production capacity in China will grow, it’s expected that demand will continue to greatly exceed supply. In fact, export opportunities are the reason we believe the upward trend in Canadian production will continue as packers and producers gain confidence that the demand will be sustained.

Canadian per capita consumption of pork has been fairly stable over the last ten years. Retail pork prices have been declining: the average price between June 2016 and May 2017 was 2.8% lower than the previous 12-month period. A similar trend was observed for beef prices while chicken prices remained flat. Pork is competitive with other protein sources and is expected to remain competitive through the end of 2017 and into 2018.