There are three components 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 U.S. market using the following equation.
Most Canadian pricing mechanisms contain three major components:
Canadian Base Price = U.S. Base Price x Conversion Factor x Foreign Exchange
The U.S. Base Price included in a local formula can be one of over a dozen prices reported daily by the U.S. Department of Agriculture (USDA) for specific regions. 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 two different markets.
Examples: LM_HG 200, 202, 203, 204…212
Examples: LM_HG 201, 213
Depending on which US base price is used to create the Canadian cash price. Currently, Olymel (via Western Hog Exchange) uses a purchased data base price known as the ISM pm (LM_HG 204), 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). Donald’s Fine Foods also uses the National Daily Direct Hog Prior Day Report.
The conversion factor and its method of calculation has long been a questionable and confusing component to Canadian pricing mechanisms. The explanation by Olymel for the OlyWest 2020 conversion factor is follows:
While no explanations have been provided by the other processors for their factors, below is a summary of the factors by company and contracts.
*The grid index is the index required to achieve the US equivalent price
The final component and quite possibly the most influential to Canadian pricing using the existing mechanisms is the Foreign Exchange Rate or the FX rate. If the Bank of Canada close FX rate falls below 1.0, the price received by Canadian producers is comparably less than in the U.S.
If you have the U.S. base price, the conversion factor and the exchange rate, it still may be difficult to replicate base prices. Converting from a daily U.S. price calculation to a weekly Canadian price implies that averages over prices must be taken. The days of the week over which the average is taken differs by packer and contract. Also, in some cases, the total weighted average on the USDA report is not used as the U.S. price. Below are detailed examples of how Canadian base prices are computed.
The “USDA Price” means USDA Hog Price multiplied by 0.5 and the USDA Pork Cutout multiplied by 0.45. Here, the USDA Hog Price reflects the National Daily Direct Prior Day Report- Slaughtered Swine (LM-HG201) report. The price used reflects the weighted average price based on head count, average net price and the average carcass weight under the Negotiated Swine or Pork Market Formula Other Purchase Arrangement and the Negotiated Formula. The USDA Pork Cutout Price reflects the average price from the National Daily Pork Report FOB Plant - Negotiated Sales - Afternoon (LM_PK602) report.
The average of the daily USDA Hog Price, the average of the daily USDA Pork Cutout Price and the average of the daily exchange rate is taken over Monday to Friday and used to compute the base price of the following week.
The new base price looks at the old base price, and if it is above $160, then old base price is the new base price. If the old base price is below $160, and if the Canadian dollar equivalent of the Average USDA Pork Cutout Price per kilogram is below $160, then the new base price is Canadian dollar equivalent of the Average USDA Pork Cutout Price per kilogram:
Otherwise, the base price is $160 per cKg.
In addition to the base price, hogs delivered are indexed as per the following table:
Term Bonus: $1 per hog for one-year contract, $2, per hog for a two-year contract and $3 per hog for a three-year contract.
Quality Bonus: $5 per hog raised under CPE, CQA, fed a nutritionally sound diet of cereal grains that does not contain meat and bone and transported under TQA or CLT certification.
Weight Bonus: $5 per hog for each carcass weight greater or equal to 100 kg and less than 113 kg.
Proximity Bonus: Like the OlyWest2020, the producer is paid a bonus based on the shortest distance to the plant. That is the producer is paid the greater of:
The “USDA Price” means the average price determined by Olymel from Iowa/Minnesota Daily Direct Prior Day Hog Report Based on State of Origin published by the U.S. Department of Agriculture (USDA) published Tuesday of the prior week to Monday of the current week using Producer Sold: Negotiated Purchase, Swine Market Formula and Negotiated Formula Prices weighted by head.
The adjusted price is computed daily. With the adjustment factor and the exchange rate a daily price is computed. Since the prices change on a weekly basis, Mondays, the price for the upcoming week is determined by averaging the daily price from Tuesday of the previous week to Monday of the current week. Averaging the daily price from March 10, 2020 ($140.47) through March 16, 2020 ($148.22) results in the weekly average price of $144.23 for the week commencing Monday March 16, 2020.
In addition to the base prices, producers are paid a quality-based premium/discount that is based on the dressed weight and the lean yield percentage. There are three grid options available to the producer under this contract. The producer can choose either the wide grid, 98 Pay Plus grid or the 102 Pay Plus grid.
Say for example, you produce a pig whose dressed carcass weight is 98kg and has a lean yield of 61%. If you were on the wide grid you would have an index of 115 for that hog. With the index of 115, the base payment can be computed as shown below.
However, the base payment is not the final price. Bonuses and premiums can be added to the base payment for a hog. Below are the applicable premiums available under the Olywest2020 contract:
$4 per hog if the carcass weight is between 100 and 110, inclusive.
A loin depth premium is paid if the carcass weight is between 85 and 113 inclusive and the fat measurement is greater than 13mm. The amount per hog added or deducted is as per the table below:
The proximity bonus of at least $3.50 for 98kg dressed hog and differs based on the distance from the plant and the hog carcass weight.
The contract bonus for ractopamine free hogs can range between 1cent to 2cents per kilogram depending on the term of the contract (one-year: $0.01/kg, two-year new or renewal or replacement contract: $0.02/kg).
The “USDA Price” means the average price determined by Olymel from Iowa/Minnesota Daily Direct Prior Day Hog Report Based on State of Origin published by the U.S. Department of Agriculture (USDA) published Friday of the prior week to Thursday of the current week using Producer Sold: Negotiated Purchase, Swine Market Formula and Negotiated Formula Prices weighted by head.
The OlyWest2019 base price is derived from the USDA LM_HG204 report. The adjusted weighted daily average price is the same as in OlyWest2020. The differences between the two prices are the day of the week selected for commencing the new week and how the average is computed. In OlyWest2019 the new week begins on Thursday and so averages are taken for reports published the previous week Friday to the current week Thursday.
OlyWest2019 averages the daily adjusted price and the exchange rate over the previous week and then takes their product along with the factor.
In addition to the base prices, producers are paid a quality-based premium/discount that is based on the dressed weight and the lean yield percentage. There are three grid options available to the producer under this contract. The producer can choose either the wide grid, 98 Pay Plus grid or the 102 Pay Plus grid.
Say for example, you produce a pig whose dressed carcass weight is 98kg and has a lean yield of 61%. If you were on the wide grid you would have an index of 115 for that hog. With the index of 115, the base payment can be computed as shown below.
However, the base payment is not the final price. Bonuses and premiums can be added to the base payment for a hog. Below are the applicable premiums available under the OlyWest2019 contract:
$4 per hog if the carcass weight is between 100 and 110, inclusive.
A loin depth premium is paid if the carcass weight is between 85 and 113 inclusive and the fat measurement is greater than 13mm. The amount per hog added or deducted is as per the table below:
The contract bonus for ractopamine free hogs can range between 1cent to 2cents per kilogram depending on the term of the contract (one-year: $0.01/kg, two-year new or renewal or replacement contract: $0.02/kg).
$1 per hog is paid if the hog is greater than or equal to 83kg and less than 110kg.
The Signature 3 base price per 100kg hot dressed weight for a 100-index hog F.O.B. (seller pays freight) is computed as shown to the right.
Here, the “WCB (PM)” refers to the Western Cornbelt Negotiated Purchase weighted average afternoon price as reported by the USDA.
The daily weighted average price as well as the corresponding daily exchange rate are collated and averaged from reports published spanning Friday of the previous week to Thursday of the current week and their product multiplied by the Signature 3 factor of 1.833 to arrive at the upcoming week’s price.
The Signature 4 base price per 100kg hot dressed weight for a 100-index hog F.O.B. (seller pays freight) is computed as shown to the right.
The “Signature 4 National “ is the weighted average price calculated from the National Daily Hog Prior Report- Slaughtered Swine published by the USDA using the Average Net Negotiated Price, the Average Swine or Pork Market Formula, the Average Net Other Purchase Arrangement, and the Net Negotiated Formula.
The Signature 4 National Price is computed daily and for the upcoming week commencing Friday March 20, 2020, the Signature 4 National price and the corresponding daily exchange rate averaged over the 5 previous business days and their products taken. The product is then multiplied by the factor of 1.775 to arrive at the base price for the upcoming week.
The Signature 5 base price per 100kg hot dressed weight for a 100-index hog F.O.B. (seller pays freight) is computed as 50% of the Maple Leaf Signature 3 Base Price plus 50% of the Maple Leaf Signature 5 Base Price.
In addition to the base prices, producers are paid a quality-based premium/discount that is based on the dressed weight and the lean yield percentage. There are two grid options available to the producer under this contract. The producer can choose either the ML 97kg grid or the ML 101kg grid.
Say for example, you produce a pig whose dressed carcass weight is 98kg and has a lean yield of 61%. If you were on the ML 97kg grid you would have an index of 115 for that hog. With the index of 115, the base payment can be computed as show below.
However, the base payment is not the final price. Bonuses and premiums can be added to the base payment for a hog. Below are the applicable premiums available under the Maple Leaf Foods contract:
$1.25 per hog if the carcass weight is between 100 and 118.49, inclusive.
A loin depth premium is paid if backfat measurement is greater than 13mm. The amount per hog added is as per the table below:
A $2 per hog premium is paid if the hog delivery is made on a Sunday.
A $1 per hog premium is paid for a hog fed a ractopamine free diet.
At the end of each year Maple Leaf will payout a top up as per
Here, Signature 3,4 and 5 refers to the 52-week average price for that year. Weight and Index are the full year averages.
The Donald’s Fine Foods (DFF) base price per 100kg hot dressed weight for a 100-index hog F.O.B. (seller pays freight) is computed as shown on the right.
The LM_HG201 is the weighted average price calculated from the National Daily Hog Prior Report- Slaughtered Swine published by the USDA using the Average Net Negotiated Price, the Average Swine or Pork Market Formula, the Average Net Other Purchase Arrangement, and the Net Negotiated Formula.
The LM_HG201 Price is computed daily and for the upcoming week commencing Friday March 20, 2020, the LM_HG201 price and the corresponding daily exchange rate averaged over the 5 previous business days and their products taken. The product is then multiplied by the factor of 1.775 to arrive at the base price for the upcoming week.
In addition to the base prices, producers are paid a quality-based premium/discount that is based on the dressed weight and the lean yield percentage. Below is the grid used.
Say for example, you produce a pig whose dressed carcass weight is 98kg and has a lean yield of 61%. On the grid, you would have an index of 116 for that hog. With the index of 116, the base payment can be computed as:
However, the base payment is not the final price. Bonuses and premiums can be added to the base payment for a hog. Below are the applicable premiums available under the Donald's Fine Foods contract:
$1.50 per hog if the carcass weight is between 93kg and 103kg and an index of 111 or greater.
A $2 per hog premium is paid if the hog delivery is made on a Sunday.
A $1, $1.50 or $2 per hog premium is paid for contracting on a 3-year, 4-year or 5-year term, respectively.
A premium of $2.50 per head is for Hogs that are Landrace x Large White F1 x 100% registered Purebred Duroc-sired hogs.
Although not directly tied to the price of the hog. When it comes to making sound economic decisions one may need to evaluate how freight factors into the overall value of a hog. If it would normally cost $6 per hog to ship hogs to your packer, and there is no considerable price difference when other premiums and bonus are considered, Since DFF covers the cost of shipping, then that would be the equivalent to generating up to $6 per hog in economic value (based on some simplifying assumptions).
The base price has a floor which is the minimum of either $1.45/kg or 90% of the USDA cutout value.
Although the Quebec price is not available to the western Canada producer, there is value in knowing how pricing is determined and how it tracks in comparison to prices in western Canada. It provides you the producer with more information.
Like the Maple Leaf Signature 4 computation, The Quebec price starts with a USDA LM_HG201 report. From the report, the weighted average value per hundred weight is computed from the Negotiated and the Swine or Pork Market Formula markets (Reweighted National). The result is compared to the pork cut out carcass value USDA from the National Daily Pork Report FOB Plant report (LM_PK602).
In the example, in the reports released on May 4, 2020, the reweighted National price was US$60.62/cwt representing 56% of the pork cutout of US$107.81/cwt. Therefore, the US window price is 90% of US$107.81/cwt or US$97.03/cwt.
The US dollar value is adjusted by the exchange rate, US and Canadian carcass yield and pound-kilogram conversion to arrive at a Canadian (CA) window price in dollars per 100 kg (cKg). A $2/cKg premium is added to arrive at the Qualité Québec Global price.
Coming soon!