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Canadian Pricing Mechanism

Alberta Pork Pricing & Marketing Information: Prepared by Phoenix AgriTec Inc.

Explanation of Canadian pricing mechanisms:

Most Canadian pricing mechanisms contain 3 major components:

  1. US Base Price
  2. Conversion Factor
  3. Foreign Exchange

The above mentioned 3 components are the staple of most prices across the prairies and in eastern Canada. There are many different versions and combinations, but for the most part nearly all Canadian prices are derived from some US market using the following equation.

US Base Price * Conversion Factor * Foreign Exchange

1) The US Base Price included in a local formula can be one of over a dozen prices reported daily by the USDA for a specific region(s) in the US. Of the 12 or more prices, some are considered purchased data while others are referred to as slaughter data. Below is a definition of the 2 different markets:

Purchase Data Highlights

  • Regional reports are all purchase data, ISM, WCB, ECB
  • Bought by packers on a given day
  • Not processed so no knowledge of carcass characteristics, premiums/discounts
  • Base Price only
  • Different leanness and weights
  • Look forward in TIME
  •  Examples: LM_HG 200, 202, 203, 204…212 

Slaughter Data Highlights

  • Slaughtered on a given day and purchased over the last 2 weeks
  • Contain more data than purchase data
  •   Include base price, net price, live weight, carcass weight, sort loss, backfat, loin muscle depth
  • Standardize % lean
  • Look backwards in TIME
  •   LM_HG 201, 213

Depending on which US base price is used to create the Canadian cash price, certain characteristics will follow. Purchase data, for example, is commonly more volatile than slaughter data, meaning if price is rallying purchase data price will gain in value more rapidly than slaughter data. Conversely, when US prices are in a sharp downtrend, slaughter data will take more days to devalue compared to purchase data. This difference is evident when comparing weekly prices that use different base prices during weeks when cash either jumps or collapses. Using only a weekly comparison can greatly skew the data due to the lag effect in some prices.

Currently, Olymel (via Western Hog Exchange) uses a purchased data base price known as the ISM pm (LM_HG 206), Maple Leaf Sig. 3 uses a purchased data base price known as the WCB pm (LM_HG 212), and the Maple Leaf Sig. 4 uses slaughter data compiled from the National Daily Direct Hog Prior Day Report (LM_HG 201). Other major Canadian markets such as HyLife Foods and much of the Ontario market have also moved to slaughter data.

2) The conversion factor and its method of calculation has long been a questionable and confusing component to Canadian pricing mechanisms and was introduced into pricing methods in its current form just over 10 years ago. Prior to that, a similar method was used to convert US per hundred weight values into Canadian per kilogram or hundred kilogram values but through a long and complicated calculation.

The previously used complicated calculation originated from converting LIVE prices in the US to Canadian values. Before moving to CARCASS pricing, LIVE prices involved purchasing of the whole hog inclusive of premiums and grade in that hog. Keep this note in mind when reading the index denominator below.

The intention of the conversion factor is to change the US base price value of a hog slaughtered in the US without a head (yielding 74-76%) to a value of a hog slaughtered in Canada with the head on (yielding 80-82%).

The simplest version of the conversion factor is as follows:

(74/80) * 2.2046) / index

(74/80) = 0.925 This part of the equation lowers the price in Canada due to the purchase of the head by the plant.

2.2046 This part converts the US price from pounds or hundred pounds to kilograms or hundred kilograms

Index: The index is included in the formula as a denominator to once again lower the price to remove any premiums from the base price so that the hog can then be run through a specific plants grading and grid system to have premiums added back on.
 

  • The problem with the index denominator is, depending on which base price is being used, some US cash prices do not have premiums in them to be deducted. For example, the ISM pm or LM_HG 206 is a purchased data price meaning there is no knowledge of carcass characteristics, premiums or discounts. So why then are the Canadian markets removing index premiums (with the denominator) from the US price when there are none there to remove? The denominator, or in its earlier form a deduction of premiums was a carry over from LIVE pricing done prior to the current mechanism. It appeared only natural to continue to deduct from the carcass price although premiums in some cash prices no longer existed.
  • Secondly, if the index is included in the formula, what index should be used in the calculation? Some plants have chosen to set the index at the actual plant average and leave it constant while others, particularly Olymel in Alberta, have chosen to use this denominator as a variable to alter price. The larger the index in the denominator, the lower the factor and the lower the local price will be. In the case of Olymel, the actual index of the plant is not the final number used to create the cash price. There exists a negotiated addition to the actual index, agreed to by the plant and marketing board quarterly, which contributes to a higher index, lower factor and lower local price. It should be noted that other packers in Alberta, BC, and Saskatchewan also use this developed formulae price as their base price for negotiating.

3) The final component and quite possibly the most influential to Canadian pricing using the existing mechanisms is the Fx or Foreign Exchange Rate.

The multiplication of some reported Bank of Canada rates (noon or close) to a US base price and conversion factor remains the final step in creating the Canadian base price per kilogram or hundred kilograms.

This multiplication in the early 2000s, when this current system was developed, had an extremely positive impact on the final Canadian price. The average Bank of Canada noon rate from July 2001 to July 2002 was 1.5676 CDN/US. Today there is a significant negative influence on price since the dollar crested Par and already put the Canadian hog industry at a disadvantage to the US industry when it moved above 95.00 cents US.

The multiplication of a Bank of Canada noon rate below 1.0000 further deducts from the comparable price received by producers in the US. The Bank of Canada noon rate as of this article’s publication on July 7th, 2011 is 0.9587 CDN/US compared to 1.5676 in 2001/02, roughly 10 years ago. The difference in exchange rate, holding US base price and conversion factor constant, represents a 39% decrease in Canadian pricing over the 10 years.

Other packers in Alberta, BC, and Saskatchewan also use this developed formulae price as their base.