Canada recently introduced a program to assist its hog industry. Based on a recommendation
from the Canadian Pork Council, the program has two components that can provide direct
economic benefits to hog producers. One component will pay producers to exit the industry. The
second component provides partial loan guarantees under commercial terms to potentially viable
producers who elect to remain in production and restructure their operations.
The US National Pork Producers Council (NPPC) opposes the program and cites a study from
Iowa State University that estimates a 7.5% reduction in North American hog prices as a result
of the program.
The study is not publically available, so it is not possible to analyze it. However, the claim is
astounding. The aim of the first part of the Canadian program is to reduce the Canadian breeding
herd by 5%, which would eventually reduce the number of market hogs from Canada
accordingly. Assuming price flexibility for pork between -1.0 and -2.0, the loan guarantee
program would need to result in 6.75 million to 13.5 million more hogs from Canada than would
have been the case. This is based on 2008 production levels. If the first component results in a
5% reduction, the loan component would need to result in a 27.5 – 52% increase in Canadian
production in order to suppress prices by 7.5%.
It’s extremely hard to imagine how a program that reduces sow inventories, provides marginal
loan benefits to a relatively small portion of Canada’s industry, and that, at best, guarantees loans
at levels equal to about half of variable costs could ever have any negative impact on North
American prices, let alone one as large as is claimed. Several potential issues that must be
addressed in a proper analysis of the supply response to this program have been identified in this
paper.
Nevertheless, an official of the NPPC, quoted today (August 26), says that the program will put
the onus on poor American producers to adjust and relieve the responsibility from Canadian
producers. No one should have any sympathy for this type of woeful spin. The fact is that
Canada has already reduced its herd by 14.5% from its peak in 2004, and total inventories of
hogs in Canada the second quarter of this year were down 19.4% since mid-2004. During the
same period, US mid-year inventories of hogs grew every year until 2008 before dropping
slightly by 1.4% this year. Meanwhile, US producers have added to this summer’s poor prices
by loading another 4-5 lbs of weight on each hog they ship to market. The market expects that
August 2009 pork production in the US will set a record.
I don’t know whether this Canadian program is good policy or not from a Canadian perspective.
I do know it is responsible from an international trade perspective. It appears inevitable that
there will be threats and the potential reality of yet another trade action by the NPPC. One can
only hope that, when it occurs, the US industry will be held responsible for its failure to adjust to
an ugly market situation, and that proper economic analysis is used in the argument.
One of the major reasons for the current situation in the hog industry is domestic and
international reaction to the outbreak earlier this year of the new H1N1 virus, which is daily
misnamed swine flu in North American media. It has scared domestic consumers and
international customers away from pork and has reduced demand. The NPPC might better use
its resources and influence to fight that real battle than to blame its trading partner for nonexistent
negative effects of a benevolent program.