Mark Greenwood
April 2008
Losses Continue
The swine industry is going through a very painful period. To put it in perspective, let’s suppose the average producer is losing $30 a head every day. Let’s also assume an average slaughter of 425,000 head per day, the industry is now losing $12.75 million each day. With at least 22 days of slaughter each month, the industry is losing $280.5 million a month. This has been occurring for at least 3 months and---probably closer to 4 ½ months---resulting in a lost of $841 million for the first 3 months of this year. Some producers have some margin protection, but the point that I am making is that equity is eroding very quickly in the industry.
Let’s take an example of a 5,000 sow producer that on October 1, 2007, had a net worth of $4 million on total assets of $5 million which equates to 80% owner equity (4/5 = .80 or 80%). Let’s also say they have been marketing 8,200 head a month with a loss of $20 per head per month for almost 6 months. 8200 x 6 months = 49,200 head x $20 = $984K in losses. In 6 months, the producer in this example lost nearly a million dollars and almost 20% of their net worth. At this point the producer, along with their lender, should start addressing this erosion of equity.
What Should I Do?
A very commonly asked question in the past 6 months. Many producers are in a state of shock. Examine the ups and downs of feed costs from March 13th through March 25th and it’s easy to see why. Corn dropped almost $.60 a bushel and later move up $.40. Meal has dropped $80 a ton but moved up $40 a ton earlier this week. Prices are whipsawing so fast that most producers are reluctant to do anything. Staying on the sidelines seems at times the safest. Risk management will separate the best from the rest in the future.
Circo Vaccine Benefit
After looking at slaughter numbers and the cold storage report, there is a lot of supply to work through. Here are a couple of thoughts on numbers and the benefit of the Circo vaccine affect. If mortalities, lights and culls were reduced by 5%, there could be potentially 2.8 million more pigs because of the circo vaccine benefit. The Dec. report stated there are over 56 million head on feed. Take 56 x 5% and that equals 2.8 million pigs that need to marketed over an estimated 27 weeks. (2.8 million / 27 weeks = 103,704 head more per week/ 5.5 work days = 18,855 more harvested pigs per day) In addition to the benefit of reduced mortality, the gains are also better. Several systems that are trying to reduce weights, but the pigs are gaining faster than they anticipated. This is a large part of why pig numbers and slaughter weights are not coming down.
A Plea to all Swine Producers
Producers are facing very difficult decisions if this equity erosion continues. One approach that might help, reducing sale weights by at least 5# per head (preferably 10#) would help get harvested numbers down to a more reasonable level. It will be difficult to do this at 430,000 head per day, but if numbers drop below 420,000 and sale weights are reduced , that might help the industry’s supply issues. A 5# reduction on 420,000 head a day is equivalent to a little over 8,000 head a day. (420,000 HD x 5# = 2,100,000# of pork / 260# animal = 8,077 head at 260#) Pork producers are going need to take a proactive approach to reduce supply and drive pork prices to improve.
