Mark Greenwood
February 2008
Producers are Nervous – I attended both the Minnesota and Iowa Pork shows this month and there are a lot of producers that are nervous about the future of the Pork industry. I spoke to several groups and outlined what I am currently seeing in the countryside. There are very few systems that locked in 4th quarter and 1st quarter of 2008 margins. I have been asked to give an estimate on margins that were covered and I would say 30-35% have feed coverage and hog coverage through that time period. These producers that locked in that amount of coverage are still losing over $20 per head. Even if you locked in the futures on hogs, the basis widened dramatically because of the large slaughter numbers. In summary, swine economics are ugly and people are hoping that we will see some liquidation.
Liquidation is occurring and units are for sale in the US – Everybody is talking about the Canadian sow’s liquidating but there has been a flurry of activity in the US also. When we had the last crop report and all grains spiked there was a flurry of activity of producers that said ‘ENOUGH’. The issue from what I am hearing from the cull sow buyers is there is no place to take the product. I heard from 2 buyers that are saying if you do not have a relationship with them currently they will not be able to take your sows. Cull sows today are under $.10 a pound, so for a cull sow today you are getting $30- $40 a head. If we could move the product or get the sows culled, I think we would see even quicker liquidation in the US. This will not help us reduce our supply but there is no question that there is liquidation occurring. I also know of several sow systems of various sizes that are for sale. Some might stay empty and others will change hands.
What Should I do? – Those of you that know me, I like to help provide solutions that can make you profitable. Today, there are no easy answers – only tough decisions to make. I outlined a couple of things that I think producers should consider.
- Reduce sale weights by at least 5#. A reduction in sale weights by 5 # is like taking over 8,000 head a day out of the US industry. This would reduce supply 2% and help pork prices. Also, selling hogs at 280# with $5.00 corn and $3.30 meal with current hog prices are not to your benefit either.
- Get rid of your bottom 5% - everybody has this. Why do we keep it? I know this is not an easy decisions but it is also about survival. The bottom 5% of your operation is costing you money and if you deal with this, it will help your breakeven costs.
- Get proactive on controlling your supply of corn. To think that you can just buy corn cheap in the future is not dealing with reality. I am encouraging you to talk to your contract growers that also raise corn and ask for a first right of refusal to buy the corn. That gives you ACCESS to the supply. Also, talk to grain farmers and try to develop a relationship with them. Many of you have supply arrangements with packers; why not supply arrangements with grain farmers? Grain farmers are as nervous about these markets as you are. You can also help reduce their fertilizer costs with the manure that you can provide as nutrients. You need to be proactive, not reactive!
Pork and Food will cost more – I discussed this with people and outlined the pork industry. The new breakeven for hogs is around $70-$75 today. We will need to see carcass prices at $80 for our industry to be viable. Packers also need to be profitable, wholesale cut out value will have to be at $88-$90. Today that same wholesale value is at $56.90.. In other words, pork prices will need to increase substantially (some industry experts estimate 35-40%) in the future for the industry to be viable. We are not alone in this analysis and it will happen with other commodities. What that will do to our consumption and our export demand is yet to be determined, but the one thing I do know is that pork prices will have to go up for the industry to survive.
