Swine Industry Update: Talk About a Roller Coaster Ride
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Mark Greenwood
August 2008
Anyone who is involved in the swine industry can understand this feeling; it seems like we are on a roller coaster. Never in my 25 years in the swine industry have I seen such swings in economics. Last month I was writing about corn over $7 a bushel and projected breakevens at $185-190 a head. Today we are seeing corn below $5.50 a bushel in the Midwest and a breakeven model with present day feed costs at $160 a head. This is a swing of $25-$30 a head in a span of less than a month. Hog prices have also surged to almost $80 carcass. While we are still losing some money in the industry, we are hemorrhaging much less today than a month ago. What lies ahead?
Opportunities are on the Horizon
In examining current feed costs and future prices for hogs on the board, there is an opportunity to minimize losses and in fact probably make money during 2nd quarter of 2009. This window of opportunity can reduce some losses for 4th quarter of this year and can also potentially lock-in some profits. I have stated many times that risk management must be a major part of your business going forward; you must implement sound risk management practices for your business to be viable.
Going Public on a Message to the Swine Industry
I spoke at the National Pork Industry conference earlier this week that was put together by Graham-Shields Strategic Forums. I want to thank them for the opportunity to present my message. Though my message may not be popular, is something I believe we must consider as an industry to be profitable again. The following are the key points I stressed for the industry to consider:
- The U.S. industry needs to reduce sow numbers by at least 10%
- The industry needs to reduce market weights and keep marketing as current as possible to avoid lower prices this fall
- Large systems must lead the way, with the top 30 producers publicly sharing their intentions
- A viable long-term model will emerge – most likely this will be a farrow to finish model
In my presentation, I used the egg industry as an example for comparison. The industry was also suffering from low prices and low earnings, but after the industry cut production back by 1-2%, earnings increased. I spent some time researching Cal Maine Foods, the largest egg producer in the US to further demonstrate my point. I compared their March 2007 earnings to March 2008 earnings and also compared their stock price from August 2007 against today’s price. Below is a snapshot of how their financial performance improved after the industry decreased egg production:
March 2007 YTD Income: $18 million
March 2008 YTD Income: $115 million
August 2007 stock price: $15.69
July 22 2008 stock price: $39.35 (I wish I would have invested!)
During a Q&A session at the NPI conference I could sense that this solution will not be favorably received or even considered by most producers. The decision today is in the producers’ hands. Unfortunately, if a downtown occurs, liquidation will most likely follow. Most producers see themselves as survivors; I hope for everyone’s sake that we can find the solution to get us there.
In closing, we have seen a tremendous drop in feed prices in the last month. Producers that use risk management strategies to take advantage of these opportunities can reduce or minimize losses and in fact can see profits on the horizon. As I have said in previous columns, risk management will separate the best from the rest in the future.
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