COOL Fallout Hits Canadian Producers Hardest

Steve R. Meyer, Ph.D.

Paragon Economics, Inc.

National Hog Farmer's North American Preview

Nov 14, 2008

As promised last week, this week’s topic is mandatory country-of-origin labeling (COOL) and its impact on the U.S. and Canadian pork sectors.

While not the “worst of times,” I think a par-plus Canadian dollar wins that award in spades. COOL is not a good development for Canadian producers. In the long run, I don’t believe it is a good development for U.S. producers either, especially if it precipitates a trade action by Canada and all of the ill-will that will engender.

Mandatory COOL seems to be playing out much as I expected. A few U.S. packers will not purchase pigs with any Canadian ties. Most notable among those is Smithfield Foods and its midwestern subsidiaries, John Morrell and Farmland. Vertically-integrated Triumph Foods and Seaboard Foods will not buy Canadian-sourced pigs and neither will Hatfield Quality Meats nor Indiana Packing. The other companies among the top 10 U.S. slaughter firms (Tyson Foods, Excel, Swift, Hormel Foods and J.H. Routh) all plan to slaughter Canadian-sourced pigs. Only Tyson has said it plans to slaughter Canadian market hogs, however. The top 10 companies account for 88% of all U.S hog slaughter capacity.

The U.S. packers that have decided not to take Canadian-origin pigs have done so for, I think, one or more of these reasons:

1. They don’t need them. That might mean they haven’t needed them in the past or that they believe they can find U.S.-origin pigs easy enough to adjust.

2. They think that not buying Canadian-origin pigs will force the Canadian sector to contract, thus driving up pig prices.

3. They want to avoid the costs of duplicate stocking units (sku), segregation, logistics, etc. that buying pigs with Canadian ties will allow.

The packers that plan to use Canadian-origin pigs may believe any or all of those reasons, too. They have just decided that the reasons are trumped by the economic realities of large plants with high fixed costs that require high throughput. They will, consequently, find a way to efficiently use at least some Canadian pigs.

Under the original 2003 mandatory COOL rules, product from any pig with a Canadian tie could have carried the same label, simplifying the segregation process. Not so under the most recent set of rules. Products from pigs born in Canada and raised and slaughtered in the United States will carry a “Product of the United States and Canada” label. Product from pigs imported from Canada for immediate slaughter (i.e. born and raised in Canada) will carry a “Product of Canada and the United States” label.

The class that is most in question is Canadian market hogs shipped to the United States for slaughter. As can be seen in Figure 1, that number has dropped from 3.28 million head in 2007 to a projected volume of just under two million head this year. The weekly numbers (Figure 2) have been falling all year, but they have moved sharply lower since Oct. 1, when the rules went into effect. Further, the drop in market hog imports has coincided with a noticeable increase in Canadian hog slaughter (Figure 3). Canadian slaughter during the five weeks prior to COOL’s Sept. 30 start-up had averaged 205 head/week less than one year ago. The five weeks since then have seen those numbers rise to 11,504 head/week more than one year ago. Imports of these hogs could be headed to zero. I don’t see any way for packers to handle three labels efficiently.

I think the real question is what will happen with Canadian weaned pigs and feeder pigs? Those numbers (Figure 1) are about even with last year. The weekly data trended downward early this year, but have recently been in the 110,000 to 120,000/week range. Currently, there is a lot of interest on the part of U.S. finishers in securing sources of U.S.-born pigs. That has understandably put negative pressure on prices of Canadian pigs. Much of this shift, though, is based on fear of the unknown – just how will U.S. packers play this thing out? Will there be problems when USDA’s six-month “education” period ends March 30, 2009?

The ultimate answer will be two-fold. First, how will U.S. consumers react to the “Product of the United States and Canada” label? My guess is that U.S. consumers will not mind that at all. We have a pretty positive view of things “Canadian” and I’m sure the product will not be visibly different from U.S. product. This will probably not be the case for the beef industry, where there will be countries other than Canada added to the list. I think U.S. consumers’ views of labels including Mexico, Uruguay, Brazil, etc., will be somewhat more negative.

Second, how will the logistics work out and what will be the ultimate costs of segregation, additional skus, etc.? That will be highly dependent on how much of the product can be merchandised through exports and foodservice where it does not have to be labeled. It will also depend on any technological solutions that can be brought to bear. For example, will labeling application, bar-coding or some other technology be developed to make the multi-label solution less onerous? My guess is yes. Necessity is still the mother of invention, and anyone who has been through modern packing plants knows that these people can be pretty clever with machinery.

Again, COOL is certainly not a good thing for Canadian producers. It is worse for those who are currently shipping market hogs to the States. At present, it is certainly bad for sellers of weaned pigs and feeder pigs, but I think that will get better when the fear factor subsides a bit. COOL will benefit Canadian packers and the product from any pigs left in Canada, by COOL restrictions, will still compete directly with U.S. product either in the U.S. market or an export market common to the United States and Canada. In the long run, that will be bad for U.S. producers, too.

But this whole thing is better for Canadians with the loonie (Canadian dollar) at $0.80 or even $0.85 than it was at $1.02.

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