Thank you, Mr. Chairman.
Good afternoon, ladies and gentlemen.
The Animal Nutrition Association, ANAC, is the national trade association of the livestock and poultry feed industry. Our membership comprises about 170 members across the country, including feed manufacturers and distributors, suppliers of feed ingredients, and providers of a wide range of services to the industry. Collectively our members account for 90% of commercial feed manufacturing in Canada.
I don't want to burden you with a whole bunch of statistics, but there are a few key ones I want to put in front of you to give you an idea of some of the scope we're dealing with.
Total Canadian feed production averages just under 30 million tonnes a year. It varies from one year to the next, but is generally between 25 million and 30 million tonnes. Commercial production, which is the membership we represent, makes up approximately two-thirds of this total, with a balance of about 10 million tonnes produced by on-farm facilities.
Hog feed represents a major share of overall production--about 40% nationally. However, the national ratio doesn't give the full picture of the potential impact of ongoing contraction of the hog market. In Alberta and Manitoba, hog feed represents over 60% of total production, while in Ontario and Quebec it is closer to 50%.
At the individual mill level, the impact of the hog industry crisis is potentially much more damaging. Depending on the makeup and size of local livestock herds, it is not uncommon for some manufacturers to rely on hog feed for two-thirds or more of their overall production--and we've heard numbers up to 80%. Of course, at the opposite end of the spectrum relative production volumes for hog feed will be much lower for individual facilities, depending on local demand factors.
Feed represents the largest input cost for hog producers, accounting for up to 75% of the total cost of raising an animal. Traditionally much attention has been focused on the prices paid by livestock producers for their feed supplies. But it's actually the cost of feed ingredients--the input cost to feed manufacturers--that is the principal determinant of feed selling prices. Corn, wheat, barley, soy, and the co-products of processing these grains are the main ingredients used to produce hog feed, along with a number of micro-ingredients--vitamins and trace minerals--that add nutritional value to the feed.
While agricultural commodity prices are typically volatile when viewed over the short term, recent annual averages reported by Agriculture and Agri-Food Canada show a generally stable trend. For example, the price of corn rose by about 7% from 2007 to 2008, but it is forecast by AAFC to decline at a similar rate from 2009 to 2010. The price of soy has shown general stability over decline, as is also the case for wheat and barley.
The key point, however, is that no matter what happens with the price of individual commodities, the feed industry continues to operate on extremely tight margins--typically under 15%. Of course, just the cost of production is taken into account here. Therefore, manufacturers have no choice but to pass cost increases on to their customers when they occur. However, producers will also benefit when commodity prices trend downward. It is worth noting that AAFC's forecast of farm input prices estimates a 1% average annual decline in feed prices over the period from 2008 to 2017.
On the impacts of the hog crisis on the feed industry, there is currently a process of rationalization taking place in the feed industry resulting from a shrinking customer base, reduced livestock inventories, and surplus feed manufacturing capacity across the country. Of course, this applies not only to the hog industry, but to livestock in general. Some economically unviable feed mills have already closed, and others will do so in the near future. Acquisitions and mergers, accompanied by the shutdown of redundant or under-producing facilities, are a fact of life in the feed industry.
As I mentioned previously, hog feed production is a major component of our industry's business. At the individual feed mill level, where hog feed accounts for two-thirds or more of total production for many facilities, the consequences of deep reductions in the herd will be acutely felt by feed manufacturers over the near to medium term. However, our industry is well aware that the effects of the recession, a rising Canadian dollar, the imposition of COOL on hog and pork producers, and the fallout from H1N1--often misnamed “swine flu”--have all combined to create an extraordinarily difficult environment for the hog industry.
Recognizing that the prospects for the feed industry rise and fall with the health of its customers, feed manufacturers are working with hog producers to provide the support they can while the market gradually recovers and the hog industry puts its transition plan in place. A large part of the assistance provided by feed mills involves extended credit terms to hog producers.
Although necessary, often to help keep their customers in business, credit practices being seen today are exposing some feed manufacturers to significant losses. ANAC estimates that under current market conditions, the Canadian commercial feed industry is carrying between $550 million and $730 million in accounts receivable from hog producers. Given the variation in hog feed production volumes from one manufacturer to the next, this credit risk is not borne evenly across the country, so the risk of loss or even failure is creating significant concern for feed mills with higher hog feed production rates.
The question arises whether the financial assistance available to qualifying hog producers under the government's hog industry loan loss reserve program, which we've heard spoken of earlier, and the hog farm transition program will be sufficient to protect feed manufacturers, which to a large extent are sharing with their customers the risks facing the hog sector.
The loan loss reserve program in particular seems to be intended to deal with the type of situation described here. In its August 15, 2009, news release, AAFC stated that “producers with sound business plans will be able to access short-term credit for operating costs such as feed and payroll”.
As the government and financial institutions involved in delivering the program begin the process of evaluating applications, ANAC proposes that they consider the impact of their decisions not only on the hog industry, but also on feed manufacturers, which in the majority of cases will be the largest unsecured creditors.
Those are my comments, Mr. Chairman. I'd be happy to answer any questions that I can.