Hog biz desperate for major overhaul

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handout photo Brandon�s Maple Leaf plant is in a more secure position following the acquisition of Puratone Corp.

Many heaved sighs of relief when Maple Leaf Foods put up $42 million to buy the financially troubled hog and feed producer Puratone Corp. in a move one market analyst dubbed a "strategic necessity."

The deal spares Manitoba's third-largest hog producer from almost certain bankruptcy and, while it doesn't solve Maple Leaf's problems in securing enough hogs to keep two shifts running at its Brandon slaughter plant, it at least prevents the situation from becoming much, much worse.

Just last April, months before the U.S. drought sent feed prices soaring and two of Canada's largest producers into a financial tailspin, pork industry officials were warning declining hog production in Manitoba was putting the Brandon plant's future at risk.

Hog production, even with Puratone being spared, has declined much more since as dozens of hog producers across the province have emptied their barns and ceased production. So this is far from being over.

A combination of high feed prices and the cost of meeting stricter environmental regulations has made it difficult or impossible for independent producers to stay in business. Ownership of the barns and the hogs is moving to the packing plants that make enough processing profit to offset the production costs, at least for now. Not so long ago, Maple Leaf was selling off hog barns.

But in the present context, Maple Leaf's purchase is logical, and it doubles its in-house supply of hogs overnight. Great news, as long as you are not one of Puratone's unsecured creditors. Maple Leaf's offer is less than one-third of the $112 million Puratone owed.

But what about the other creditors -- people who were unaware that simply by doing business with Puratone they were subsidizing its operations?

The creditors' list goes on for eight pages -- grain farmers who supplied feed, small businesses, vets, plumbers, truckers, restaurants and individuals sprinkled across Manitoba. Some of the debts are in the six-figure range -- numbers large enough that it will be difficult for some to recover from the loss. Puratone wasn't even paying its water bill; it owed $23,000 to the Altona Rural Water Service Co-op when it sought bankruptcy protection.

Maple Leaf is on the record as saying the plight of these unpaid suppliers is not its responsibility. It's buying assets, not Puratone's liabilities.

Legally, that's correct, and to be fair, Maple Leaf didn't create this mess.

The people running Puratone had to have known as they were ringing up some of these bills that there wasn't a ghost of a chance of paying them. And they should be held accountable.

However, it's a short-sighted position for Maple Leaf to take when it will be dependent on these same suppliers to support its operations in the future. And it sets back the industry's efforts to convince governments and the public that it is a good corporate citizen.

The next logical step would be for Maple Leaf to start acquiring farmland and teaching some of its imported workforce to drive farm equipment. That way it won't have to depend on independent grain farmers, who might be leery of delivering feed to an industry that touts its importance to the Manitoba economy, but doesn't pay its bills.

The federal and provincial governments have taken a hands-off approach to the latest financial crisis to hit the hog sector. There will be no additional subsidies outside of pre-existing programs, a tacit recognition there is little to be gained by propping up the current structure.

Even some industry insiders have started to concede the industry needs to address structural issues that put Canadian hog producers at a $10 per hog competitive disadvantage to their U.S. counterparts. This industry grew out of a cheap Canadian dollar, and the mistaken assumption grain prices would never rise.

But so far, the response has been to continue down the same path towards integration, except at a faster pace. Even some of the burned suppliers admit they were relieved to see Maple Leaf step up to save Puratone from insolvency. Why? Because they fear the alternatives might be worse.

The hog industry, once a major stabilizing force in the farm and rural economy, is now responsible for increased uncertainty and volatility. It's not a question of whether Manitoba needs a hog industry. It does. The question is whether the hog industry we have has a future.

Laura Rance is editor of the Manitoba Co-operator. She can be reached at 792-4382 or by email: laura@fbcpublishing.com

Republished from the Winnipeg Free Press print edition November 17, 2012 B18