Mark Greenwood
October 2007
Cost of Production Hike Brings Losses – It’s amazing how quickly market conditions can change. Remember back in early August? Cash market prices were in the low to mid $70s and we had every futures month on the board at $70 or above. Plus, the rumor was that China was in the market for buying lots of U.S. pork. Life was good, and it seemed that even though we had more hogs coming to market, prices were going to profitable. Also, at the same time, grain prices were coming down and corn in southern Minnesota was below $3/bu., and it looked like even with the ethanol boom, we were going to have realistic corn prices.
Now at the end of September, the cash hog market is hovering in the high $50s. Corn has jumped from $3/bu. to $3.50/bu. in southern Minnesota, and soybean meal has jumped from around $220/ton to $265/ton. In just a 60-day period, your cost of production has risen about $8-$9 a head, and your revenue has dropped $30 a head. Needless to say, I do not think September will be a profitable month for the pork industry – and we could be looking at a tough fourth quarter for the industry. Lots of Pigs – The fact that there are a lot of pigs out there should not be a surprise to anyone in the industry if they have been looking at a couple of things. The first factor responsible for this trend is the number of weaned pigs and feeder pigs coming down from Canada. I do not see this trend slowing down. The Canadian dollar was on par with the U.S. dollar last week. What many Canadian producers are doing is selling weaned pigs and/or feeder pigs into the United States, retaining ownership and feeding them out. To the Canadian industry, this is a means of self-preservation. Secondly, performance in most sow herd systems in the United States is excellent. That fact combined with improved production due to the circovirus vaccines being so effective, equates to a lot more pigs being produced and marketed. I remember writing a column in the beginning of 2007 and stating that death loss on hog farms in the United States was up 1-2%. That equates to a loss of 70,000 sows. Today I believe that death loss is down at least 2%. Along with the improvement in sow productivity, that equates to the addition of 100,000 more sows to the marketplace, even though we didn’t actually add more sows to the U.S. breeding herd. The Future for Pork - What does the future hold? If you look at the futures market for pork in 2008, things do not look that bad, and there are still opportunities to lock in profits for next year. If you look at prices on the Chicago Board of Trade through October 2008, the average price is above $72 or a total return of $140 a head on a 200-lb. carcass. Even with the higher feed costs, there is still profit potential for 2008! I have stated numerous times in this column about locking up profits. It is up to you as a producer to manage that risk. Since 2004, locking up prices on the futures market has proven to be the wrong decision, and you were better off just using the cash market. That still might be true, but also betting that the cash market will always be there is also a hedge in my mind. If you know your costs and can see a margin that you can live with, I think you might sleep better at night than not knowing what lies ahead. I firmly believe in the next two years that marketing – selling your pigs and procuring your feed needs – will separate the best from the rest more than any other factor in the marketplace. Swine Industry Update Archives
