Series: Agriculture
The objective of this post is to show how Quebec and Ontario hog prices respond to shocks in foreign markets. In the two provinces, hog prices are set based on US reference prices. Their values are therefore representative of what’s happening in the North American hog and pork markets. Nonetheless, Quebec and Ontario hog prices possibly respond to what’s happening elsewhere in the world if US reference prices are sensitive to events in other markets. I show below how price shocks in Europe and China affect hog prices in Quebec and Ontario.
I begin with background information about the hog price formulas in Quebec and in Ontario.
Before February 2019, the Quebec hog price formula was based on the weighted average of prices for Producer Sold Negotiated and Producer Sold Swine or Pork Market Formula from USDA report LM_HG201. Since February 2019, the formula incorporates as well the value for a Reconstituted Carcass from USDA report LM_PK602. In that formula, the US reference price is conditional on the ratio of the average price from LM_HG201 and the value for a reconstituted carcass from LM_PK602. If the ratio is below a certain threshold, then the reconstituted carcass price is used as a reference. Above the threshold, then it is the average price calculated from LM_HG201. The threshold has been adjusted over time and my understanding is that it was changed in the recently agreed upon formula.
In Ontario, the formula uses a US reference price calculated from USDA report LM_HG201. From that report, Ontario Pork essentially replicates the CME Lean Hog Index price, over which is based the lean hog futures. Ontario Pork refers to its reference price as the CME Constructed 201 Price.
US reference prices are adjusted for the exchange rate, carcass yield and other factors to calculate prices in the two provinces . Figure 1 compares Quebec and Ontario daily prices. Both prices are for 100 index hogs and were collected from Ontario Pork. Before revisions to the Quebec formula in February 2019, prices in the two provinces tracked well. Afterwards, prices in Quebec were higher until April 2022 when the Quebec hog price was cut by 40 CAD/100 kg. The Quebec hog price stayed below the Ontario hog price until early 2023 after reductions in the price cut.
Figure 2 shows the components of Quebec and Ontario price formulas. Notice that the three reference prices (CME constructed 201, LM_HG201 and LM_PK602) track each other well. The start of the pandemic in March caused larger swings in the LM_PK602 price than in the values for CME constructed 201 and LM_HG201. I also included the exchange rate because US prices are converted to Canadian dollars in the formulas.
From their formulas, hog prices in Quebec and Ontario directly depend on prices in the United States. Do market shocks in hog and pork markets outside North America affect hog prices in Quebec and Ontario? It could be the case if shocks in other countries impact US prices, hence affecting hog prices in Quebec and Ontario.
Figure 3 shows weekly indexes for hog and pork prices in selected countries. I normalized the prices after converting them into Canadian dollars to avoid issues with units of measurement. I included in Figure 3 the US nearby futures for lean hog to compare how prices in Spain, Denmark and China evolved compared to the US price. The figure shows no obvious correlation between prices across countries except for prices in Spain and Denmark. This suggests that prices in Spain, Denmark and China have a small impact, if any, on prices in Quebec and Ontario. I estimated models for hog prices to verify whether this is indeed the case.
I picked the price of hogs in Spain to represent the price of hogs in Europe. Spain is the second largest hog producer in Europe after Germany. I did not choose Germany because German pork was banned by several countries after the discovery of African Swine Fever in wild hogs in September 2020 and later in domesticated hogs.
Figure 4 shows how Quebec and Ontario hog prices respond to a 1% increase in the price of hogs in Spain. The shaded areas are confidence intervals. The shock to the price in Spain occurs in week 1. The model allows for the shock to spread over several weeks as the US market may not respond instantly to events outside North America. For both Quebec and Ontario, the shaded areas overlap with zero on the vertical axis indicating that a 1% price shock in Spain does not impact prices in Quebec and Ontario, even after several weeks.
I also selected Denmark because it is the third-largest European pork exporter, after Spain and Germany. Moreover, Denmark has a reputation as a reliable supplier of high quality pork and competes with Canada in several markets. Denmark exports in 2021 were comparable to Canada.
Figure 5 shows that Quebec and Ontario hog prices do not significantly respond to a 1% increase in the price of hogs in Denmark.
I use data for wholesale pork price in China because I did not find data for the average China hog price. China is the world’s largest pork consumer and importer. As Figure 3 shows, pork prices in China climbed between summer 2019 and summer 2021 because of the African Swine Fever crisis that the country went through. During that period, China imported significantly more pork meat, in particular from Europe and Brazil. Exports to China from the United States and Canada increased but were hampered by trade disputes.
Figure 6 shows that a 1% shock on pork price in China does not significantly affect hog prices in Quebec and Ontario.
What to make of those results? They tell us that hog prices in Europe do not significantly affect hog prices in the US, and in consequence prices in Quebec and Ontario. Perhaps this is not too surprising as there is very little hog trade over long distances. It is pork that countries trade. Prices for hogs and pork are connected but it seems not sufficiently for the models to find a relationship between hog prices in Europe and in North America. The results also tell us that pork price in China does not affect hog prices in Quebec and Ontario. This finding may be due to the 25% retaliatory tariff imposed by China starting in April 2018 on imports of agricultural products from the United States. The tariff reduced US exports while prices in China peaked during the African Swine Fever pandemic, resulting in lower hog prices than otherwise in the United States, and as a result in Quebec and Ontario as well.
Note that the weekly data may yield more muted price responses than a model with daily data. Estimating the same models with daily data may have resulted in stronger relationships. I wish I had weekly data for Brazil hog prices to include that country in the models. Brazil has been growing into an important player in the world pork market.
Although the models do not find that Quebec and Ontario prices are related to prices in Europe and China, it does not mean that we can ignore what’s happening in these markets. Export opportunities can appear and disappear from what’s happening in Europe and China. Prices may not move but export volumes may be sensitive to events in those markets.