Staring down the barrel of a slaughter capacity crunch this fall, the National Pork Producers Council has sprung into action to cushion the blow.

One course NPPC has taken is to meet with Canadian pork producers and government officials in an effort to maximize North American slaughter capacity in the all-important fourth quarter.

"While U.S. production has grown little since 1998, hog production in Canada has increased by more than 20 percent," says NPPC president Dave Roper. "This increased Canadian hog production is displacing U.S. pork sales in Canada, the United States and in third country markets. It also is resulting in higher levels of live hog exports to the United States. This year, 5.8 million Canadian hogs are expected to cross the border, up from 5.3 million in 2001."

The U.S. slaughter capacity crunch of 1998 was compounded by labor strikes in Canadian packing plants, which sent even more hogs into the U.S. market.

Roper says the first order of business in the meeting with the Canadians was to ensure there were no labor issues looming in the future. Then U.S. and Canadian producers and government officials can assess slaughter capacity and slaughter numbers to see what is coming.

"We want to recognize what is in our power to do, and to open up a dialogue to troubleshoot future problems," says Roper.

Shipping U.S. live hogs to Canada to be slaughtered is an unlikely option, at least in terms of getting it done by the fourth quarter of this year. There are issues with Australia, one of Canada's pork export markets, who won't accept pork from countries dealing with the pseudorabies virus. That would include the United States. So, Canadian packers that want to ship pork to Australia won't kill U.S. hogs.

Perhaps even more important is the economics of the issue. Canadian plants tend to have higher labor costs, which make it hard to bid competitively against U.S. plants. The weaker Canadian dollar in comparison to the U.S. dollar also makes it more profitable to send hogs to the United States.

"If the Canadian dollar would strengthen against the U.S. dollar, sending U.S. hogs to Canada would be a more viable option," says Steve Meyer, National Pork Board director of economics. "The Canadian dollar has been steadily weakening over the past couple years and I don't see anything to indicate that will change anytime soon."

So, the economics might prevent U.S. hogs from heading north even if the two countries agreed to allow market hogs to enter Canada for slaughter.

"When you look back to 1998, the United States was still importing market hogs from Canada during the worst part of the slaughter capacity crunch," says Ron Plain, agricultural economist, University of Missouri. Plain points out that the United States slaughtered 169,000 head of Canadian hogs in November 1998 and 220,000 head that December.

A more viable option this time would be for Canada to keep more of its market hogs at home, where there's excess slaughter capacity. Exactly how many market hogs are coming to the United States under long-term contracts is unclear. There's also the weaned pig issue.

"One thing we need is data on feeder pigs and slaughter hogs imported to the United States from Canada," says Plain. "We need to look at how many of the Canadian hogs are coming south as part of a long-term contract and how many are negotiated sales."

If most of the Canadian hogs are coming into the United States to fulfill contracts, it means they will likely come no matter what the U.S. price is. Still, even a small reduction can make a big difference when slaughter capacity tightens.

"With slaughter capacity, it's not an issue of volume over capacity, it's that last straw that can be a back breaker," says Roper.

While opening the U.S. and Canada border by the fourth quarter may be unrealistic, the long-term effects if successful could be significant.

"Long term it creates the potential for Canada to increase kill capacity," says Plain. "It's not efficient for Canadian plants to hire workers for a three-month period when the United States has a kill capacity crunch."

An open border with Canada would bring about a lot of market opportunity, but also some risk.

"Pork producers on either side will at different times be better off with an open border," says Meyer. "Both countries are looking to export pork, that often means the same markets."

Talks with Canada are not the only action NPPC has taken. Representatives also have asked the U.S. government to make pork a priority in food purchases for the school-lunch and food-aid programs.

The main point is that NPPC is being proactive, rather than reactive, says Roper. If each action that NPPC, the government or any other organization takes helps the fourth-quarter price situation a little, it might be enough to avert disaster. At least this time, the pork industry understands what can happen and is working to minimize the impact while there may still be time to have some positive effects.

Canadian Exchange
The current strength of the U.S. dollar compared to the Canadian dollar is one thing that makes shipping Canadian market hogs to the United States so attractive, and sending hogs north so unattractive.

The question is what could happen in the future and what is the current trend of the Canadian/U.S. exchange rate?

"The Canadian dollar has been weakening steadily for the past couple of years and I don't see that changing anytime soon," says Steve Meyer, National Pork Board director of economics. "The United States wouldn't want the type of recession that would weaken the U.S. dollar enough to make exchange rates with Canada more favorable."

Here's the daily exchange rates for four dates each year since 2000.

Value in Canadian
Date to $1 U.S.

5/9/2000 – $1.49
8/8/2000 – $1.49
11/8/2000 – $1.53
2/8/2001 – $1.51
5/8/2001 – $1.54
8/8/2001 – $1.54
11/8/2001 – $1.60
2/8/2002 – $1.60
5/8/2002 – $1.57
oanda.com

Country-of-origin Law Muddies the Waters
Country-of-origin labeling, included in the Farm Bill, was meant to make things clearer for consumers, but it may only prove to muddy things up for the rest of the pork chain.

Under the proposal, only pork from hogs born, raised, slaughtered and processed in the United States can be identified as U.S. pork. It's not clear what label pork from Canadian-born/U.S.-raised hogs will carry.

Perhaps, more importantly, the additional labeling will add costs for packers/processors to keep that pork segregated from U.S.-born and raised pork. Packers and processors are almost sure to pass the costs on to producers.

"It will pump a larger share of the consumer dollar into the middleman," says Ron Plain, University of Missouri agricultural economist.

USDA will write the specifications for country-of-origin labeling. Those final requirements will greatly affect the regulation's ultimate impact.

Packers are likely to discount Canadian-born pigs, which means U.S. producers might tend to be less than honest about their pigs' origin. If tracking and enforcement systems are required, it will add costs to the entire pork chain.

"The most logical system would be to discount Canadian pigs, but it may get hard for the packer to tell Canadian pigs from American pigs," says Steve Meyer, National Pork Board director of economics. "The packer may just discount all hogs, by offering lower prices, which would hurt the entire industry."