During Alberta Pork’s annual general meeting (AGM) in November 2020, a resolution was passed to explore “a single-desk selling system, similar to Quebec,” and during Alberta Pork’s semi-annual meeting in March 2021, one producer asked whether the Quebec pig pricing model was well understood, and whether other producers knew how the price was calculated.
Coming out of that discussion, nearly half of producers in attendance indicated they did not have a full grasp of the Quebec price. To provide more information for those who may need it, below is a breakdown, examining how the price is calculated, using relevant examples to demonstrate its application in the market.
How the Quebec price is calculated
Although the Quebec price is not available to western Canadian producers, there is value in knowing how this price is determined and how it measures up to prices in western Canada.
The centralized marketing system in Quebec allows for a global price to be computed, and this is the price all packers in that province apply to their gird adjustments. This global price, like in the OlyWest 2021 contract, is a blend of the U.S. Department of Agriculture’s (USDA) national price, using the whole carcass report (LM_HG201) and the pork cutout value report (LM_PK602). From these reports, a U.S. window price is created, from which a Canadian window price is derived. Specifically, the U.S. window price is computed from a series of conditions:
- If the ratio of the national price (LM_HG201) to the pork cutout value (LM_PK602) is less than 65 per cent, then the ratio is kept at 65 per cent, which means that U.S. window price is 1.38 times the national price (0.90/0.65 multiplied by the national price).
- If the value of the national price (LM_HG201) is less than 90 per cent of the pork cutout value (LM_PK602) but greater than 65 per cent, then the U.S. window price is 90 per cent of the pork cutout value.
- If the value of the weighted national price (LM_HG201 plus adjustments) is between 90 per cent and 100 per cent of the pork cutout value (LM_PK602), then the U.S. window price is the national price.
- If the value of the weighted national price (LM_HG201 plus adjustments) exceeds the pork cutout value (LM_PK602), then the price used is the pork cutout value.
To establish a Canadian window price, the U.S. window price (in U.S. dollars (USD)) is adjusted by the exchange rate, U.S. and Canadian carcass yields and pound-to-kilogram conversion, which results in a price reported in Canadian dollars (CAD) per 100 kilograms (cKg). A CAD $2/cKg premium is added to arrive at the Quebec global price.
The table below shows an example of how hogs are priced in Quebec. Two of the most significant drivers of hog pricing variations across Canada are the dates and contents of the reports used in the pricing formulas.
In the Quebec price example, reports dated March 15, 2021 will generate the price for March 17, 2021, while western Canadian contracts may be based on average prices of the previous week (Monday to Friday or Friday to Thursday).
Even though some major Canadian contracts use the USDA’s whole carcass report (HG201) for the U.S. national price, those packers use different components of that report in their computations.
The Quebec formula uses the weighted average of the negotiated price and the ‘Swine’ and ‘Pork Market’ formula categories in the report. While certain packers may weight the price on the head count of the different categories, the Quebec price is weighted on the total carcass weight (head count multiplied by the average carcass weight).
In the example above, the weighted average price is computed as:
The cutout value is the pork carcass price reported on March 15, 2021: USD $102.44/100 lbs. The ratio of the national price to the cutout value (88 per cent) determines the U.S. window price. Since the ratio falls between 65 and 90 per cent, the U.S. window price is 90 per cent of the cutout value (USD $92.20/100 lbs).
The next step is to convert the U.S. price to a Canadian price. Adjusting for the relative U.S.-Canadian yield, imperial-metric conversions (from 100 lbs. to 100 kilograms (cKg)) and the USD-CAD exchange rate, the Canadian window price of CAD $234.65/cKg is computed. The quality premium of CAD $2/cKg is then added to arrive at the Quebec global price of CAD $236.65/cKg for March 17, 2021.
The reported final Quebec global price is not necessarily the price paid to producers, as this price is initially discounted and reimbursed depending on the quality of the pig.
In the example, the Olymel Plus 13-week average index of 111.7 is used. For the example, assume the producer is on the 261 Quebec Quality Grid. If the producer’s hog optimally fits the grid, an index of up to 115 can be recouped for yields between 59.6 per cent and 61.79 per cent, and weights between 87.5 kg and 119.9 kg. This means the perfect hog carcass would receive a price of almost CAD $244 (CAD $211.86 multiplied by the 115 index). However, any hog that weighs above 120 kg or below 87.5 kg, or yields less than 59.59 per cent of meat, will be significantly discounted from the Quebec global price.
Alberta Pork’s economics web section is designed to support producer success by providing the necessary tools for effective financial decision-making. The section includes pork market and hog supply reports, contract pricing breakdowns, information on our cost of production study and the latest economic research.
If you have any questions or concerns, contact Bijon Brown, Production Economist, Alberta Pork by email at firstname.lastname@example.org or by phone at 780-440-8460, toll-free at 1-877-247-PORK (7675).