Mark Greenwood Posts
The last eight months have been a bit challenging for those of us involved in the swine industry. It’s been especially challenging for those who don’t have some sort of risk management plan in place and have executed ahead of the drought’s impact on margins. Besides the need to manage risk, the need to be a competitive low cost producer is vital to establishing a platform that will allow you to be profitable.
It’s amazing to see the productivity levels that production systems are achieving today. The productivity levels are a huge positive for our industry and they show us just how far the industry has come in regards to improving animal husbandry and animal welfare practices. A few things we see in successful producers are as follows:
- Owning the sow. There are a few exceptions, but those who have owned the sow have had more profitability long term.
- Successful production systems are achieving average pigs weaned per sow, per year, between 25 and 30. Yes, some systems are hitting 30. When you look at high health production systems like this, they are not only likely low cost on the weaned pig but the down line finishing productivity is equally impressive.
- On the finishing side, a good benchmark would be a wean to finish mortality rate of 5% or better and selling 92% of placed hogs as Grade A sales. We do see some profitable systems with production that doesn’t hit these marks but more often the profitable units are at or below these types of numbers.
What do you look at as successful production in your system?
Like we have mentioned countless times over, being able to marry quality production and the understanding of your costs, to a risk management plan, will greatly improve your long term ability to lock in margins. One of the keys to understanding risk management and volatility is that exports are huge, especially when exporting 25% of your product. Below is a graph from Brett Stuart, with Global Agritrends, that illustrates the affect of the reductions in exports early in 2013 and how those might play out the rest of the year if something doesn’t change. Given this, it’s no surprise we have weakness in the cash and futures markets for lean hogs. Were you prepared for last year’s downturn and have you looked at what margins are acceptable for your operation?
I believe that another long term key for producers to remain profitable and be successful is to become more involved in advocating for your industry. With such a small portion of the population involved in agriculture, especially animal agriculture, this will be vital long term. Unfortunately, some countries have not had the advocacy programs in place to handle animal rights group agendas and this has led to much smaller industries and higher food costs. Those involved in agriculture need to help educate the general public, whom may have no understanding of modern agriculture, or the reasons for modern agricultural practices. This will be as important as risk management and good production going forward.
The producers remaining today are very good at everything they do and they are always looking for ways to improve which makes the United States the most competitive country in the world when it comes to pork production. This also makes it an exciting industry to be involved in as there is continuous improvement and change with new technologies and innovations. I look forward to seeing the progress we make in the future.Published: 4/29/2013
Join us for the next “AgStar Edge Experts Live” webinar presented by Brett Stuart of Global AgriTrends and Mark Greenwood, AgStar’s Senior Vice President of Relationship Management. This session will help producers identify risks and opportunities, related to exports, in the livestock industry. Brett will provide global outlook and industry insights related to the protein sector, specifically the swine industry. Mark will give his take on what this means to you and for the agriculture industry.
This session is free; register today! If you are interested in attending, but cannot make the session, sign up to receive the recording after the event.
Interested in receiving notifications on upcoming AgStar Edge events? Sign up for advanced email notifications.Published: 4/11/2013
Compared to a year ago, exports to China are off by 54% since January. This is mainly the result of the ban of U.S. pork fed ractopamine. The U.S. and China are in discussions about third party verification of ractopamine-free pork which could help in the long term. But the question remains: What will we do with 800 million pounds of pork if the Chinese and Russian bans persist?
Current Market Conditions
The cost of production has gone from $165/head range at the end of the third quarter last year to $185 to $190/head today. These costs are strictly driven by the aftermath of the drought causing higher corn and soybean meal prices. The typical producer’s average inventory cost has risen by $15/head. Whether the impact will affect a producer’s equity position will depend on their risk management plan. However, the percentage of owner’s equity is impacted even with a breakeven over that timeframe.
Assuming a producer has 25,000 head of inventory and a 50% owner’s equity, the change in feed costs alone would reduce the owner’s equity to 43% if the owner broke even. Over the same time, if an operation lost $20/head, owner’s equity would have fallen to 34%, which is a significant deterioration of the balance sheet.
We have some reason to believe there was significant risk management in place heading into 2013. One of the metrics we look at in our portfolio is the availability of the revolving lines of credit our clients possess. In the 2012, the average operating line was being used at approximately 25% level. This steadily increased during the fourth quarter of 2012, based mainly on tax planning through prepaid feed and deferrals. Currently, the level borrowed is higher than a year ago and stands at 32.4%. With the lower prices and higher cost structure over the past quarter, I would have anticipated this number to increase more rapidly. However, the percentage borrowed has fallen by 3.1% from a month ago.
There are two reasons why working capital has remained strong. First is the level of risk management we have seen with producers breaking even on their hedged hogs in the fourth quarter last year and beginning of the first quarter this year. Secondly, with the recent deterioration in the futures markets, operations with substantial coverage have pulled in the hedge gains and applied it to their operating loan balance. This can be deceiving if cash hog markets do not improve into the summer months, since the hedge gains have been realized.
In summary, the industry certainly has its challenges with volatility in the grain markets and cash hog prices. Producers have good working capital positions today, although it looks like this will erode as we head into the last half of 2013 for those with no risk management plans in place. Margin management will continue to separate producers. No one could have predicted the severity of the drought. However, producers need to dictate their own future in this industry by taking advantage of all the resources available and be willing to implement a plan. Published: 3/25/2013
On this week's Hog Blog, AgStar's Steve Malakowsky discusses the recent sequestration and the impact it's going to have on the industry along with a discussion on ractopamine.Published: 3/8/2013
As we head into the second quarter of 2013, I think it is imperative to keep a close watch on a few external and internal developments to manage through what is shaping up to be another volatile year for the pork industry. The ability to understand and respond accordingly is shaping the pork sector’s financial strength and more importantly, returns on your farm’s investments and assets.
Recent price reductions in the hog markets have caused a great deal of concern for producers. Iowa – Southern Minnesota base carcass prices paid for market hogs has declined over $20 per head in the last three weeks. Although cash corn markets have declined by $0.40 per bushel in the same time period, producers who were near breakeven a few weeks ago are now looking at $16 per head losses based on the current metrics. Futures prices for pigs based on the June/July futures have been eroding since the beginning of the year and margins have declined for the second and third quarters of 2013 from $20 per head to $5 per head recently. Most of the market news has been around the export markets and challenges in a couple of key global pork importers as it relates to market access. The only good news is that I think there is more future price risk management in place today than maybe any time in the past.
Even though external factors are generally outside your ability to influence or change I still believe they deserve your regular attention. Some key factors to watch:
Grain Production / Grain Use
Most likely the biggest issue on everyone’s mind is the 2012 drought and grain production prospects for 2013. The things I am currently watching are ethanol production and corn exports as they are having the most significant impacts in the rationing of corn until new crop. Also, one needs to keep an eye on planting intentions, and the current drought in the western Corn Belt.
As has been reported recently, issues have surfaced with exports to China and Russia related to the use of ractopamine. China (including Hong Kong) imported 431 thousand metric tons of U.S. pork and pork variety meat in 2012 valued at $886 million. Russia was significantly less at 98 thousand metric tons and $282 million. Together these two export markets represented 23.4% of U.S. pork export volume and 18.5% of total export value. More significantly, these two countries combined are expected to represent more than one-third of global pork imports, and are key growth market opportunities for U.S. pork.
Driven by U.S. household income and disposable income in addition to supplies of competing meat and retail prices, this is a complex issue with many moving parts and is very hard to predict. I am watching closely the competing meat supplies, with beef production in 2012 down 1.1% for the year where predictions were for beef supplies to be off much more. Feedlots managed to add nearly 18# to the average animal harvested in 2012 which drove beef production higher than expectations. While poultry supplies were down in 2012 from the prior year, recent production has increased significantly with better retail prices at the meat case.
These “external” factors are driving the profit opportunities for the pork industry and bear watching in the coming months. Although the industry has significant price coverage in 2013, most producers would like to add more protection at levels that offer decent return on investment. The “internal” decisions you make to take advantage of, or protect yourself from these factors, you have little control over but will be critical to your future success.Published: 3/4/2013