A lesson from the 2006-2010 Canadian hog crisis : ASRA, efficiency, vertical integration and the cash flow which saved the Quebec hog industry

Quebec hog producers have been long benefiting from an income stabilization program called ASRA (Assurance Stabilisation du Revenu Agricole) and launched in 1975. This program is an income insurance program that guarantees a compensation to farmers when the market price is below a benchmark cost of production. The farm’s contribution is partly subsidized by the provincial government. The ASRA program covers among other products hog, sows, corn and soya.

By its design, the ASRA program tends to overcompensate the most efficient producers. In 2010, a controversial change was introduced to the calculation of the benchmark cost of production (exclusion of the bottom quartile, the least efficient farms of the sample), but it was subsequently abrogated. Changes were also introduced, at this time, to modulate the level of the farm’s contribution according to the size of its operations relative to the benchmark model (The subsidy decreases from two third to half of the contribution when the operation is at least thrice larger than the benchmark model).

Quebec hog farmers have always strategically optimized their legal structure in order to maximize the level of income stabilization. Initially, it was by separating all production activities in order to get ASRA for crops (corn and soya), even though they may be used as feed for hogs, as well as ASRA for hogs and sows by doing farrowing and finishing in separate legal entities. Then, when the level of subsidy was indexed to the size of the operations, it was time again to adapt the legal structure to the new environment.

Disaggregating farming operations in different legal entities was the backbone of the business model of the main vertically-integrated groups but it was also chosen by medium to large independent farrow-to-finish farms. During the period 1995-2006, when hog production boomed in Quebec, this allowed the most efficient producers to greatly benefit from the ASRA program while the financial position of the program itself was deteriorating.

Some of the hog producers invested that excess cash outside agriculture (say residential real-estate, sometimes in Florida). Others were focusing on developing their business, especially among what would become the main family-owned vertically-integrated hog groups, which then were then able to consolidate the scope of their activities from feedmills to meat processing.

From 2006 to 2010, the Canadian hog industry went through a series of crisis – porcine reproductive and respiratory syndrome, porcine circovirus, H1N1 (‘’swine flu’’), appreciation of the Canadian dollar, COOL legislation in the US, all ending up in severe margin squeeze. They had the cumulative effect of eating away the equity of many hog farms. This culminated in 2009 when the federal government had to intervene drastically through two federal emergency programs (Hog FarmTransition Program and Hog Industry Loss Loan Program). Yet, in Quebec, these programs were not widely used.

During that time, I held different positions in banks involved in financing hog production, positions which gave me a privileged insight into some of the dynamics underlying the restructuring of the Canadian hog industry. Statistics and business news showed that the Quebec hog value-chain weathered quite well this string of crisis, without having to reduce significantly its herd nor going through major bankruptcies, contrary to the Western provinces.

The resilience of the Quebec hog industry can be, at least partly, explained by the fact that the major players of the industry had enough cash reserve going into the crisis. Because of the business model I have described above, vertically-integrated groups had benefited from large ASRA payments over the years, especially since their hog-producing operations were generally much more efficient that the benchmark model used by the ASRA program to calculate compensation. When the businesses were well-managed, that extra cash was used to shore-up their financial position and develop their activities along the whole value-chain. Hence, at the time of the crisis, they were able to keep cash flowing into the system, offering much needed liquidities by contracting with farmers who were otherwise considering exiting the hog production altogether. It is worth noting also that the high prices for grain and oilseeds, while squeezing hog margins, were facilitating this restructuring as many farmers could thus divest only partly their hog operations (usually giving up on farrowing to focus on finishing).

What greatly contributed to save Quebec hog industry during the crisis were not that much ASRA payments to small to medium-sized independent farrow-to-finish hog farms, but the large payments that many thought were unduly received by integrated groups. Therefore, I am wondering whether the hog industry in Quebec would have been in such a good position at the outset of the crisis should the vertically-integrated groups have been excluded from the ASRA program along the line proposed by the working group on income security in agriculture (See report here, in French).