U.S. President Barack Obama's plan to increase ethanol production as part of his "green" energy plan could spell a severe decline in Canadian pork exports, predicts the author of a recent report that calls for closer ties between hog and feed grain producers on this side of the border.

Al Mussell, a senior research associate at the George Morris Centre, a Guelph, Ont.-based agricultural think-tank, says Obama's policy threatens to drive up the price of hog feed - a pork farmer's biggest expense - at a time when Canadian producers are struggling to stay competitive in a global market.

Eventually, says Morris, the Canadian industry's survival could be at risk, because hog producers and pork-processing plants must locate close to feed facilities to remain profitable.

"It's a remarkably simple dynamic," says Mussell. "When you've got a region that has competitive low-cost grain production, what happens is the livestock will follow the competitive grain ... The processing plants follow the livestock."

Obama has called for more ethanol to be produced from cellulose-based sources, including woodwaste. But such production technology is not yet commercially viable, and most ethanol now comes from grain and corn.

Ottawa and the provinces have been working to increase the use of ethanol in conventional fuels and boost biodiesel consumption. The federal government and some provinces offer fuel-tax exemptions for ethanol.

Most provinces also have requirements for ethanol-blended gasoline, ranging from five- to 10-percent ethanol. Last year, a new federal standard was also introduced requiring conventional diesel fuel to contain two-percent biodiesel. Ethanol is a key component in biodiesel.

"But by not connecting the fundamental dynamics in this marketplace, I think we've really shot ourselves in the foot with respect to the meat business," says Mussell, adding Canada's best move would be to "walk away" from its own plans to gradually increase ethanol blends in fuels.

Mussell's report also calls for a "reconciliation" between grain and livestock producers, the former whom are increasingly choosing to sell their products to ethanol producers over pork farmers.

Jacques Pomerleau, executive director of Ottawa-based Canada Pork International, the industry's export-marketing agency, says hog and grain producers would probably be wise to follow Mussell's advice.

He notes the exchange rate and access to international markets will present the two biggest challenges to Canadian pork exports this year.

"We expect our exports to remain stable, at around one million tonnes for the coming year, because of many factors," says Pomerleau. "The production is going down in Canada, but there are less live hogs going to the U.S. at the same time."

Since U.S. pork prices determine rates in this country, says Paul Hodgman, executive director of Alberta Pork, Obama's plans to boost ethanol production through tax cuts, loans and subsidies will put Canadian hog producers at a huge disadvantage.

"If governments go on subsidizing ethanol production, it will be a continued strain, because those plants compete directly for our input," says Hodgman. "So (feed) prices likely will go up."

Hodgman says Alberta Pork is working with the provincial government and grain organizations to figure out how to get access to high-quality feed grains so that hog farmers can overcome their problems and grain producers can make some money.

Alberta Pork is also developing a revitalization plan that looks at ways to build business, increase value chains and reduce costs. Hodgman notes the industry has to do a better job of building savings into the supply chain.

Mussell of the George Morris Centre says the increasing emphasis on ethanol overlooks the "intensive damage" being wreaked on the red-meat business. "We need to understand these things strategically before we launch long-term policy, as it would appear an ethanol-blend mandate is," he adds.

While he acknowledges that it's probably not fair to blame the pork industry's woes - specifically, high feed prices but only modest hog-price gains - entirely on increased ethanol production, the fuel has been a key factor.

And while pork and grain producers are now enjoying the benefits of a low dollar, the short-term gains may not last long and the sectors must co-operate to make their industries mutually sustainable.

"We couldn't possibly have, on an economic basis, cattle and beef production and pig and pork production without a sustainable corn and feed-grain industry," he says. "At the end of the day, their interests are in common. The cattle industry or the hog industry can not survive unless the feed grain industry is profitable and sustainable in the long haul."

Dermot Hayes, an Iowa State University economics and finance professor, says the U.S. dollar and American energy market will serve as guidelines for the Canadian pork sector.

Speaking at the recent Banff Pork Seminar, a leading gathering for the pork industry held annually in Banff, Hayes said while several ethanol-production plants have been delayed or scrapped in the U.S. and Canada, ethanol will continue to be a decisive factor in the price of feed grains on both sides of the border.

The U.S. dollar will likely continue to fall, he predicted, giving the American pork industry a small competitive advantage.

As for offshore pork exports, India could spell new gains, but efforts are only beginning to access that market. Canada Pork International says sales to China have slowed since the summer, while the Chinese government is now trying to limit imports, as is Russia.

But Alberta Pork's Hodgman is optimistic his industry will survive the current recession over the upcoming 12-18 months.

He predicts the Prairie provinces, which produce most of the country's hogs and pork products, will continue to be strong, while Quebec, Canada's largest single producer, and Ontario will fare reasonably well. B.C. and the Maritimes, which have small production bases, will suffer the most, he believes.

Meanwhile, Canada's pork industry is also waiting for Obama's new administration to release a ruling on country of origin labelling (COOL), which requires packers to indicate where products have come from.

Former U.S. president George W. Bush's government approved Canada-U.S. labels, but the decision has since been frozen and COOL is still required.

"It has had an impact already," says Pomerleau. "That's why you see a lot less live hogs going to the U.S."

(Monte Stewart can be reached at monte@businessedge.ca)