Is the end in sight for hog producers in Alberta?

Is the end in sight for hog producers in Alberta?

Postby Oscar » Fri Dec 24, 2010 12:26 pm

Is the end in sight for hog producers in Alberta? & LETTER

Two relevant articles, 1998 and 2005, by the late Paul Beingessner
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Investors Lose Their Money But the Hogwash is Never Ending

Author: Paul Beingessner 2005/08/22
Category: Pigs

http://www.mondata.com/action/pigsdetail.asp?id=961

The news came last week that Big Sky Pork is about to buy the assets of Community Pork Ventures (CPV). For those who don't follow the hog industry too closely, CPV is the holding company that owned 16 hog barns in Saskatchewan and Manitoba. The barns in the company were operated by Quadra Group, and were home to roughly 12,000 sows. The failure of this venture is a story worth telling, but beyond the scope of a single column. It is, however, a story that echoes and re-echoes in rural Saskatchewan, where community-minded folk have invested their hard earned dollars in what turned out to be a pig in a poke.

Consider the stage that was set. In the summer of 1996, Pork Producer magazine quoted the executive director of Canadian Pork International, the export promotion agency of the Canadian pork industry, saying he feels "overseas markets are almost boundless."

Quadra Group, a trio of farmers centered around Lake Diefenbaker, was early into the game. With substantial funding from the government of Saskatchewan, Quadra was determined to be a player in the industry that was supposed to fuel the recovery in rural Saskatchewan.

Everyone jumped on the hog bandwagon. Provincial governments squealed about the need to expand the industry dramatically. Raise the hogs, they told people, and the packing plant would come. However, Quadra's ambitious partners eventually got tired of spending their own money, and decided they would allow the lucky farmers of Saskatchewan into the lucrative hog business.

In a book released in 2000, Saskatchewan consultant Al Scholz waxed eloquent about Quadra's new scheme, describing it as "a unique system for raising investment capital." Quadra, he said, wanted to expand but "it was impossible to find commercial investors who were willing to put up the necessary $3.6 million, given that the concept was new and the expansion unproven." The alternative was "a community investment system that ... provides farmers with a mechanism for direct investment, ownership, and control of pig production in the enterprise. They receive some tax benefits from the arrangement, plus the right to supply the operation with feed grains and utilize the by-products as organic fertilizer." Farmers, it appears, were more expendable than commercial lenders.

Did the investors who were drawn into the "unique system for raising investment capital" receive a fair return? According to an investor in one of the earliest Quadra barns, any dividend cheques he may have gotten were a long time ago and too small to remember. Now he hears he will lose his initial capital entirely. He also told me most local farmers in his area no longer sell grain to their hog barn because it takes so long to get paid.

Four years after Scholz's book extolled the entrepreneurial spirit of Quadra Group, CPV, with most of its barns in the throes of bankruptcy, was in court trying to untangle itself from the web Quadra had woven around it. As my friend the investor said, "The shares were rolled over so many times I got tired of trying to keep track of what I actually owned."

The news Big Sky will scoop the assets of the deeply indebted CPV leaves hundreds of investors with the potential loss of their entire investment. It also leaves dozens of local suppliers out of luck, perhaps to the tune of millions of dollars. How did the three owners of Quadra Group fare while the barns were going under? With little of their own cash at risk, and collecting management fees for operating the money losing barns, they just might have made out alright. In fact, without the ability to suck investor capital out of rural communities (and the provincial government) large hog barns would not survive in the cutthroat business growing pigs has become. They exist because they are using someone else's money and paying no return on the investment.

The provincial government, which should take much of the blame since it was the big booster of the hog business, still has the following "fact" on its Saskatchewan Centennial 2005 website: "One of the Quadra Group barns was recognized as one of the top thirteen most efficient hog barns in North America. Quadra Group has been a key player in creating a critical mass of large, community-owned pig producers in this province."

Hog barns, pulse plants, care homes – Saskatchewan communities have built them all, out of a sincere desire to bring jobs to their communities. A few high paid and smooth talking consultants, a provincial government that says it all looks good. When the smoke clears, and someone scoops the assets for pennies on the dollar, the consultants are long gone and the government is too pigheaded to admit it was so wrong.

The news came last week that Big Sky Pork is about to buy the assets of Community Pork Ventures (CPV). For those who don't follow the hog industry too closely, CPV is the holding company that owned 16 hog barns in Saskatchewan and Manitoba. The barns in the company were operated by Quadra Group, and were home to roughly 12,000 sows. The failure of this venture is a story worth telling, but beyond the scope of a single column. It is, however, a story that echoes and re-echoes in rural Saskatchewan, where community-minded folk have invested their hard earned dollars in what turned out to be a pig in a poke.

Consider the stage that was set. In the summer of 1996, Pork Producer magazine quoted the executive director of Canadian Pork International, the export promotion agency of the Canadian pork industry, saying he feels "overseas markets are almost boundless."

Quadra Group, a trio of farmers centered around Lake Diefenbaker, was early into the game. With substantial funding from the government of Saskatchewan, Quadra was determined to be a player in the industry that was supposed to fuel the recovery in rural Saskatchewan.

Everyone jumped on the hog bandwagon. Provincial governments squealed about the need to expand the industry dramatically. Raise the hogs, they told people, and the packing plant would come. However, Quadra's ambitious partners eventually got tired of spending their own money, and decided they would allow the lucky farmers of Saskatchewan into the lucrative hog business.

In a book released in 2000, Saskatchewan consultant Al Scholz waxed eloquent about Quadra's new scheme, describing it as "a unique system for raising investment capital." Quadra, he said, wanted to expand but "it was impossible to find commercial investors who were willing to put up the necessary $3.6 million, given that the concept was new and the expansion unproven." The alternative was "a community investment system that ... provides farmers with a mechanism for direct investment, ownership, and control of pig production in the enterprise. They receive some tax benefits from the arrangement, plus the right to supply the operation with feed grains and utilize the by-products as organic fertilizer." Farmers, it appears, were more expendable than commercial lenders.

Did the investors who were drawn into the "unique system for raising investment capital" receive a fair return? According to an investor in one of the earliest Quadra barns, any dividend cheques he may have gotten were a long time ago and too small to remember. Now he hears he will lose his initial capital entirely. He also told me most local farmers in his area no longer sell grain to their hog barn because it takes so long to get paid.

Four years after Scholz's book extolled the entrepreneurial spirit of Quadra Group, CPV, with most of its barns in the throes of bankruptcy, was in court trying to untangle itself from the web Quadra had woven around it. As my friend the investor said, "The shares were rolled over so many times I got tired of trying to keep track of what I actually owned."

The news Big Sky will scoop the assets of the deeply indebted CPV leaves hundreds of investors with the potential loss of their entire investment. It also leaves dozens of local suppliers out of luck, perhaps to the tune of millions of dollars. How did the three owners of Quadra Group fare while the barns were going under? With little of their own cash at risk, and collecting management fees for operating the money losing barns, they just might have made out alright. In fact, without the ability to suck investor capital out of rural communities (and the provincial government) large hog barns would not survive in the cutthroat business growing pigs has become. They exist because they are using someone else's money and paying no return on the investment.

The provincial government, which should take much of the blame since it was the big booster of the hog business, still has the following "fact" on its Saskatchewan Centennial 2005 website: "One of the Quadra Group barns was recognized as one of the top thirteen most efficient hog barns in North America. Quadra Group has been a key player in creating a critical mass of large, community-owned pig producers in this province."

Hog barns, pulse plants, care homes – Saskatchewan communities have built them all, out of a sincere desire to bring jobs to their communities. A few high paid and smooth talking consultants, a provincial government that says it all looks good. When the smoke clears, and someone scoops the assets for pennies on the dollar, the consultants are long gone and the government is too pigheaded to admit it was so wrong.


= = = = = = =

Hog Barns Go Up While Prices Go Down

Paul Beingessner Column # 168 09/08/98

Elimination of the Crow Benefit brought many changes to western Canada, not the least of which is poverty. I know the conventional view is to see the death of the Crow as generating the building of all kinds of livestock production and grain processing facilities, but if these are supposed to help farmers’ incomes, they haven’t yet. If the Crow were still in place, net farm incomes in much of the prairies would be almost double.

Still, with the Crow now cold and stiff, the farm community has to figure out how to deal with the impending death of rural western Canada. Some of the solutions look less attractive all the time. Take the hog industry, for example. Just when livestock production was supposed to explode on the prairies due to cheap feed grains, (name me a grain that isn’t cheap) the prices for hogs and cattle headed for the toilet. Oversupply, you know.

Given the overproduction, you might expect the hog industry and its biggest players to stop to catch their breath for a second. Au contraire! At this point, the building of barns continues unabated. Some “experts” even say the best time to get in is when breeding stock is cheap! And we know players in the hog game are well aware of the four year cycle that haunts the industry, so they must be prepared for the current losses. Right?

Just how bad is it for the hog business anyway? Well, the price is currently hovering around $120 to $130 per hundredweight. Figures in the prospectuses issued by new barns trying to raise capital indicate their break even price to be around $170. Since the price a year ago was $220, this might not be a big deal. All part of the normal cycle. But an upswing in the cycle is triggered by a reduction in hog numbers, as some producers leave the business rather than sustain huge losses. While some smaller producers will no doubt leave, there is every indication total hog production will increase as new barns come on stream. Large producers are also less likely than small ones to exit the market when returns fall. Prices are predicted to go even lower in the fall and winter.

Since both Canada and the US are self-sufficient in hog production, every new hog raised must be exported. The market expected to swallow most of this extra pork was Asia, but the currency crisis there has meant less pork imported and in the diet. US hog production is expected to increase up to 40% over the next year or two, and western Canada is in a similar expansion mode.

Despite the obvious uncertainty in the industry, academics are unable to agree on the future. Some argue for an increase in the rate of expansion! Such a notion seems to fly in the face of common sense. If we increase numbers of hogs in an already saturated market, will we not depress prices even further? Time will tell on that one, but for now, hog investments will be made on future hopes, not present realities. No wonder they call this next year country.

Paul Beingessner

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Is the end in sight for hog producers in Alberta? & Comment

http://www.albertalocalnews.com/stettlerindependent/
opinion/111147459.html

By Will Verboeven - Stettler Independent

Published: December 01, 2010 1:00 PM
Updated: December 01, 2010 2:00 PM

It’s a well-worn headline used by many analysts when trying to find some glimmer of hope in a depressed commodity market, but that headline is beginning to have a more ominous meaning in this province. “Is the end in sight for hog producers” has rung true, but not from a more positive market prediction; instead, that end for many hog producers has been a mass exodus from the industry. Statistics indicate that there were around 1300 producers in 2002, today just over 375 are still in business. It’s even worse when you compare that to 25 years ago when there were almost 3,000 hog producers in Alberta.

Granted, years ago hog operations were a lot smaller; a hundred sows was a good sized operation with 500 sows being a big time operation. Today it seems you need a thousand sows to be a player with the large operators having up to 5,000 sows. Such sized operations have slowed the inevitable production loss, but will it be enough before slaughter infrastructure begins to be affected. If the Red Deer Olymel plant can’t get enough hogs, their economies of scale will be imperilled. I suggest that a big reason they are still in business is that they are probably paying the lowest prices for hogs in North America. That may be good business and the realities of the marketplace, but you can’t keep on doing that and expect producers to continue to take the losses and still stay in business.

Alberta Pork, the producers’ organization, has done a valiant job in convincing governments to subsidize both those that want to maintain production and those that want to exit or downsize. The last go-around in Alberta saw the government toss a few million at the economic pain producers were suffering. In exchange, the industry and their organizations were supposed to create a business-type plan to revitalize pork marketing in Alberta. A lot of thought and enthusiasm was thrown into that process including pie-in-the-sky schemes about premiums from niche markets for Alberta pork products. I am not sure of the fate of those plans, perhaps the Alberta Livestock and Meat Agency is still financing those dreams.

There is always the time-tested hope that governments will toss more subsidy money at hog producers in the also time-tested hope that the market will soon recover. That’s worked in the past, but price recovery seems to be taking a very long time to come around this time. It also seems all the AgriHope programs of the federal government have run out for the hog industry after what seems like years and years of losses.

So, what future is there for the hog industry in this province? I would suggest that severe consolidation will continue. However, I would also suggest that the only survivors will be mainly Hutterite colonies and a few large operators, some with immigrant money propping them up. The colonies are the only business operations that have the diversification base and the very long term capitalization ability to stay in the hog business. Their prominent personal participation (almost unheard of just 15 years ago) in the governing board of Alberta Pork (and other commodity organizations) indicates that they are making very serious commitments to the future of pork production. I would further suggest that once the industry has consolidated enough, the next step will be, for the few and the big, to take up an equity position in the Red Deer pork plant, if not buy it outright. It would seem to be the next logical step in the vertical integration of the industry; it’s a typical marketing approach in the U.S. That step may also be needed to prevent the plant from closing. The other option could see governments get involved with loans or guarantees, that’s never a good sign for any industry.

What’s the other alternative? I would be so bold as to suggest that the industry might want to consider the “back to the future approach.” Yes, that would be a marketing board, or rather a new-age marketing board. This approach might take a leap of faith, but think where the total open market approach has brought the hog industry today; that being down to a few hundred producers since the demise of the old marketing board structure. I always thought it was rather curious that the biggest proponents of eliminating marketing boards were packers and processors, perhaps there is a message there.

Granted the hog industry is not the dairy or poultry industry, the dynamics are certainly different, but perhaps there is something to be learned in revisiting the original concept from a different approach, learning from past mistakes maybe but also from past advantages. Having observed the general economic well being of the dairy and poultry industries as probably the most successful and profitable sectors of Canadian agriculture, it does cause one to ponder that maybe supply management isn’t so bad after-all, even in Alberta. Just food for thought.

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LETTER: SAUVAGEAU: RE: Is the end in sight for hog producers in Alberta?

From: Denis Sauvageau

Sent: Wednesday, December 22, 2010 9:29 PM

Subject: Is the end in sight for hog producers in Alberta?

So sad to see that real hog farmers are being squeezed out one more time in this effort to industrialized everything we eat.

I am not as optimistic about the views of this reporter for several reasons. One of the most important pieces of BS that he is purporting is the fact that many of the larger operations are already financed to the gills by the province through low interest loans to construct and operate these barns. That essentially means that the Prov. Gov't is in many respects in control of these farmers plight. Add to that the vertical integration and its a disaster for any individual farmer who doesn't what to be a slave to the industry. With regards to his views on large hog barn companies buying out the Olymel plant I think it will be the other way around. A few years ago I recall a video where a Olymel representative stated that his company would not be building any hog barns but that they might entertain acquisitions. The way I see it Olymel will be in a perfect position to buy cheap hog barns when the time is right....when the gov't loans aren't getting payments...when the AFSC decides to put these things out on the auction block. That being said there have been several hog barns sold by Ritchie Bros auction in Alberta and they are going for dirt cheap. I don't know who's buying them out other than the hearsay that Europeans are in on the action.

As for immigrant workers, they have already soaked up the jobs in the hog barns around here. Like many other industries it’s about making money and cheap labour along with slack gov’t regulations make immigrant workers more attractive to the bottom line than home grown employees.

As for a marketing board all I can say is that it's too damn late to even talk about the possibility in spite of the fact that it did keep pork producers of days gone by in the black ink. That will never fly when the gov't mentality continues to think "big business".

Yes I am very concerned with the fact that a stranger could be buying up the hog barns in my backyard and we will once again have absolutely no say in it. On the other hand if I was a multi-millionaire I would buy them up and make them disappear.

In solidarity;
Denis Sauvageau
Falher, AB
Oscar
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