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The Quebec government plans to double exports from the hog industry by the year 2005, a goal that will be achieved primarily through the expansion of concentrated animal feeding operations. Although these intensive feeding operations are less economically efficient than small operations, they generate high revenue in part due to cost shifting, which reduces their production costs (Weida, 2000). Cost shifting occurs when the costs of health problems, social problems and pollution are transferred to the residents of a region and are neither paid by the company responsible for the costs nor included in the price of the products they market (Wieda, 2000). Public scrutiny of the safety of waste management from animal production facilities has intensified since seven people in Walkerton, Ontario died after drinking water that had been contaminated by microorganisms from animal manure. A better understanding of how water resources and human health may be impacted by hog production is required so environmental risks of the proposed hog industry expansion can be quantified accurately.

Our goal is to provide a synthesis of existing data on water consumption, water pollution and health consequences of industrial hog farming in Quebec to provide our clients with some of the information necessary to perform a cost-benefit analysis. However, most environmental pollution is diffuse and pollution in agricultural regions may originate from many sources. Cost-benefit analyses may not be the most appropriate technique for evaluating the environmental impact of the hog industry of externalities such as health care and environmental costs. Since our clients want to perform economic analysis that accounts for these hidden costs, we propose the use of risk analysis or the precautionary principle as alternative analytical frameworks.

 Since the 1970’s, there has been a trend towards the industrialization of small, traditional animal farms into large, concentrated animal feeding operations (CAFO's) across North America. Similar expansion elsewhere in Canada has resulted in a significant increase in the national hog production for both domestic and export markets, making hog production a major component of the Canadian agricultural sector. Industry expansion created 29 500 direct and indirect jobs across Canada in 1999, and resulted in an economic spin-off of 3.7 million dollars (Federation du Porc, 2000). At present, Quebec has the highest concentration of large hog farms in Canada with 81% of the farms generating over $250 000 (MAPAQ, 2000). Hog industry revenues were 747 million dollars in 1999, and accounted for 24% of province’s total agricultural revenue (Federation du Porc, 2000). The revenue from hog exports has also increased in the last five years and over half of the hog produced in Quebec are now sold on export markets. The value of Quebec’s hog exports in 1999 was about 634 million dollars compared to 278 million dollars in 1994 (MAPAQ, 2000).

The trend toward increasing intensification and concentration of hog operations should increase profit for producers, but large operations will be subject to two economic restrictions: diseconomies of scale and diminishing returns. Diseconomies of scale occur when an element in the production process increases faster than the size of the process itself. One element in hog farming is disease; the more concentrated the hogs, the greater the possibility for disease outbreaks. The need to limit shed population sizes, the heavy reliance on antibiotics, the costs of maintaining a sterile site, time limits on site location, as well as the destruction of whole flocks because of outbreaks all increase the costs of the operation (Weida, 2000).

Hog operation size will also be constrained by diminishing returns, which is the “break-even” point where the marginal cost of one additional hog unit exceeds the marginal product of one hog unit. Manure disposal is an example of how hog operations are constrained by diminishing returns. Often, intensification of hog production is not accompanied by the purchase of more land so the agricultural land available for feed production and waste disposal remains the same (Weida, 2000; Fraser, 1985). The costs of disposing animal waste responsibly and transporting feed from locations far from the hog farm, eventually become inefficient.

The diminishing returns on larger farms are illustrated throughout the country where smaller farms have higher profit margins than large farms (MAPAQ, 2000). Profit margins are calculated by dividing the amount of profit, total revenues minus the total expenses, over the total revenue. In Quebec, small farms who declare between $50 000 and $100 000 in revenue per year have a profit margin almost five times greater than that of large farms who declare over $500 000 in revenue per year (MAPAQ, 2000).

Despite diminishing returns, farms who declare $500 000 or more in revenue are growing in number in Quebec and across Canada (MAPAQ, 2000). The apparent inconsistency between the trend in intensification and increasing internal economic inefficiency could be explained in two ways. First, large CAFO's are able to maximize tax benefits and subsidies by employing production practices that allows them to be classified in both agricultural and industrial categories. In 1997, the Quebec hog industry received around 130 million dollars in subsidies from the federal and provincial governments (MAPAQ, 2000). If the hog industry received an equivalent amount of subsidies in 1999, subsidies would have represented approximately 20% of the industry's revenue. We have not included tax rebates or other incentives that hog producers may receive. Second, cost shifting can also reduce the cost of production in hog operations. The costs of health problems, social problems and environmental pollution are paid by residents of the region, and damages are neither paid by the company responsible nor included in the price of the products they market (Weida, 2000).

The increase in CAFO's is also changing the cultural and social systems in small farming communities, and there is evidence that CAFO’s have detrimental effects on the local economies of surrounding communities. Research has shown that independent hog producers create three times as many jobs as contract producers, and for each 12 000 slaughter hogs produced by contract producers there is a net loss of over 18 jobs (Fagan, 1995). Furthermore, independent producers create 10% more permanent jobs, a 20% larger increase in local retail sales and 37% larger increase in per capita income than large corporations (Fagan, 1995).