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Soaring pork prices driving Maple Leaf Foods customers away

The Maple Leaf Foods plant in Kitchener, Ontario Wednesday on Oct. 19, 2011.

TIM FRASER/The Globe and Mail

The first signs are emerging that consumers are beginning to balk at soaring prices for pork and other meat products.

Prices for some meat products have been rising as much as 26 per cent lately and on Thursday, Canada's largest meat processor, Maple Leaf Foods Inc., said sales of sausages, bacon and other products fell by double digits. The company had been jacking up prices for its Schneiders, Shopsy's and other brands in response to rising pig prices, but sales of those products are now falling.

Michael McCain, Maple Leaf Foods chief executive officer, called the steep sales drop "a little bit shocking" and said the company lost market share to private label food processors, which were slower to raise prices.

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"These are challenging times," Mr. McCain said. Canadian consumers have faced 26-per-cent price hikes for bacon, while pork chops have risen by 18 per cent, even as overall food prices are up by less than 3 per cent from a year earlier, Statistics Canada says. One reason for the increased price is a piglet-killing virus that has swept through barns in the United States and parts of Canada, driving up the cost of a pig by 24 per cent in the past 12 months.

Mr. McCain said prepared meat sales in the second quarter recovered to a decline of about 5 per cent, a figure he called a "risk factor" for the Toronto-based food processor trying to restructure.

"Obviously, this is a challenging time," Mr. McCain said on a conference call on Thursday held to discuss the company's second-quarter financial results.

Aaron Goertzen, an economist with BMO Capital Markets, said consumers are responding to higher prices by choosing chicken over pork, or buying cheaper kinds of protein.

The incurable virus known as porcine epidemic diarrhea, which does not affect food safety, has limited hog supplies by killing about seven million piglets in the United States.

The rise in pork prices coincides with the soaring cost of beef, so meat lovers are faced with few cheaper alternatives.

"After adjusting for inflation, hog prices are now at their highest since the mid-1990s, while real cattle prices are higher than they've been since the early 1980s," Mr. Goertzen said.

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Beef prices have risen as demand from slaughterhouses and processors has outstripped supply. Ranchers are slowly rebuilding their herds after the U.S. drought of 2012 drove up feed costs and prompted widespread culls. But the recent large crops of corn and soybeans have driven down feed prices this year, and cattle farmers are taking advantage of the lower costs and breeding their cows instead of sending them to market, Mr. Goertzen said.

Mr. Goertzen said June's 5-per-cent depreciation of the Canadian dollar has meant meat prices have risen more in Canada than in the United States.

"Rising red-meat prices will likely cost the average Canadian household more than $100 per year," Mr. Goertzen said. "Consumers are not alone; food processors, grocery stores and the restaurant services industry have all seen margins come under pressure as wholesale meat prices have risen. Hog and cattle farmers, on the other hand, are enjoying a much-needed renewal in profitability after several extremely tough years."

For Maple Leaf Foods, the slump in demand helped send its prepared meats division to a loss of $15.6-million in the three months ending June 30. The division also faced transition costs of $25-million related to the opening of a new meat plant in Hamilton.

Raising prices for bacon and sausages helped Maple Leaf Foods boost prepared meat revenue by almost 10 per cent, but these higher prices reduced volumes, and the weaker Canadian dollar lifted costs, the company said.

Over all, Maple Leaf Foods narrowed its second-quarter loss to $12-million, or 13 cents a share, compared with a loss of $32-million (25 cents) in the year-earlier quarter. Analysts had been expecting an adjusted loss of 12 cents a share. Revenue from continuing operations was $831-million, a rise of almost 10 per cent.

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Maple Leaf has lost money in four consecutive quarters as it nears the end of a seven-year revamp in which it is opening new plants while closing outdated ones in a bid to become a low-cost food producer while reducing the overall payroll by 1,500.

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