Cover story: Hog producers are feeling pinch

By Dick Hagen
The Land Staff Writer

June 20, 2008 03:19 am

— University of Minnesota Extension swine specialist Mark Whitney puts the current swine dilemma this way: “Only a few years back hogs were selling for $55 per hundredweight and corn was $2 per bushel. It didn’t take a rocket scientist to figure that marketing heavier hogs meant more profit. However today with hog prices closer to $40/cwt. and corn over $5, the most profitable marketing weight has changed drastically.”
Or, in fact, is there any profit left in raising pigs, regardless of market weight?
Brian Buhr, University of Minnesota economist, bluntly said, “your current total costs of pork production are about $55 to $60/cwt. from weaning to market. That’s using corn at $5.50 and bean meal around $310 per ton. If you priced right, you could be feeding $4 or less corn, but that’s going to run out. Yesterday (April 14) hogs sold for about $58 carcass hundredweight or about $43 live hundredweight. That’s a loss of about $13 to $17 per live hundredweight. With U.S. Department of Agriculture reported average market weights of 269 pounds, that’s a loss per head between $35 and $46. Unfortunately, these numbers don’t include an accurate measure of fuel and utility costs, which are also rising.”
Dave Preisler, Minnesota Pork Producers executive director, is also forthright: “We’ve had a tremendous increase in feed costs. But the economic pain is extremely variable from farm to farm depending upon production costs. Looking at cash markets today ($45 to $49 on April 22) and with no hedges in place on either feed or hogs, you’re at losses of approximately $40 per head; some could be at the $50 mark too.”
He also points out that even for the producer growing his own corn, there are other “opportunity costs” on that corn not being realized by running it through a batch of pigs.
So is marketing lighter hogs, as suggested by Iowa State’s John Lawrence, valid? He points out that slaughter weight is a variable under the producer’s control, and unlike the number of hogs coming to market, is one that can be adjusted in the short run.
Preisler questions that logic simply saying, “weights would have to come down very substantially. Plus you can’t quickly make that sort of an adjustment. By pulling down weights you’re simply marketing earlier than your normal cycle but that means packers would need to rephase their slaughter schedules also. And that’s not easily done. Processing plants are doing record amounts right now.”
Steve Meyer, economist with Paragon Economics, commented via the internet, “there just isn’t room for processors to speed up the slaughter rates to pull marketings forward and pull weight down. Daily slaughter rates have been consistently above 430,000 head. To pull weights down 2 pounds or so, one of those days has to disappear. But about all we could possibly do is add 10,000 head on weekdays and 50,000 or so on Saturday. That’s 100,000 head per week, meaning it would take four weeks to even get that 2-pound reduction.
“Weights will come down. They always do as spring progresses, but I believe we will be hard-pressed to push weights below year-ago levels given large supplies and fast-growing pigs.”
Strangely, circovirus vaccines that have markedly cut down on baby pig mortalities, are largely responsible for the huge slaughter runs since last fall. They are also responsible for pigs growing faster than most producers believed possible.
“In a time-dominated business, faster growth rate means higher end weights, even if you are trying to get them moved,” Meyer said.
Liquidation under way?
Preisler said European hog producers started reducing sow numbers last fall, next was Canada and now it’s under way across the United States. But again jumping up sow liquidation isn’t a quick and easy fix. First there has to be room at the packers to handle the bigger numbers. Plus processors need to have a market for the additional sausage into the retail market.
Buhr said, “Judging by the March 31 hogs and pigs report, there’s not much cutting back. Market hog inventories were up 7 percent on average. The only sign of liquidation was the farrowing intentions for June-August which were down a little over 2 percent.”
Fortunately, pork exports are at record high levels, virtually into every country around the world.
“We’ve had tremendous up-ticks in exports, like right now 55 percent above a year ago. February, 20 percent of total U.S. pork production was exported,” Preisler said, but that bright spot has created new challenges — not enough shipping containers to handle this increase in overseas shipments.
Right now this is a serious enough issue that the National Pork Producers Council is attempting to work directly with various federal agencies on how to remedy this container deficiency.
Are the packers doing well during this price squeeze?
Buhr indicated packers shouldn’t be having much trouble because they’re buying hogs at reasonable prices and so far are moving the product out.
Hormel, in their March 7 quarterly report, noted a gross profit increase of 12 percent over year-ago levels. Vertically integrated companies, however, are facing higher feed costs, thus bearing some of the same losses as independent hog farmers.
Preisler said, “based on the number of hogs being marketed right now, the price isn’t that bad compared to historical levels.
“But we simply have some new expense problems never faced before, primarily feed costs but also every other cost related to pork production. So we’ve got negative margins more because of costs of production rather than market price.”
At a recent Mankato meeting ethanol got some blame for higher feed costs, but of even more concern is the possible drop-off in 2008 corn acres and what impact this might have on corn prices.
“This issue has the hog industry nervous. Will there simply be enough to meet increasing energy demands, export requirements, and livestock needs was the big question,” Preisler said, pointing out that the renewable fuels industry enjoys a mandated and subsidized usage package.
Are Canadian pigs adding to the dilemma?
The Canadian industry is under even more stress than the U.S. industry, Buhr said, because our lower dollar has really harmed their exports to our markets (our pork is cheaper) and also reduced the value of isoweans shipped here and paid for in U.S. dollars.
“So it’s more their liquidation that is hurting us than any big change in imports. The Canadian hog industry will shrink dramatically and until the dollar stabilizes or moves higher, it’s unlikely that Canada will cause many problems,” he said.
Preisler agreed pointing out that Canadian producers “lose less” money shipping isoweans down here rather than finishing those pigs. That obviously is short term because you can only lose money so long. Also their packer sector is shrinking so there are really no bright spots in Canada.
What can producers do to weather the storm?
There’s no single silver bullet. Producers need to make individual decisions on market weights, tighten control if possible of their own cost structures, get engaged with federal folks on a step up of USDA pork purchases. One such purchase falls under the Section 32 Nutrition Program, a permanent appropriation the USDA uses to support non-farm program commodities while enhancing nutrition programs. Even emergency feed assistance may be on the agenda for the more dire “what if” situations, Preisler said.
Agriculture Secretary Ed Schafer announced May 1 the USDA planned to purchase up to $50 million of pork products which will be donated to child nutrition and other domestic food assistance programs.
“Plunging hog prices have created a crisis in an industry vital to our state’s economy,” Klobuchar said in urging Schafer to act.
Buhr is more blunt.
“When you’re losing $50 per head, there’s not much to do that’s going to help. Someone obviously has to stop producing hogs. The challenge is that today’s hog industry is largely commercial with little owned acreage. The model was built on lower-priced grains. Now with higher grain prices, it’s more difficult for those producers to get out of hogs and sell the high priced corn as would have happened back in the day of producer-finishers. Therefore, we’ll probably see even more consolidation as the remaining farmer-feeders go to crop farming and the rest of the industry shrinks to the level commensurate with the new higher corn regime.”
Consumer the only winner?
Relative to foods, meats are a good deal, but it won’t last long, Buhr said. The “short chain” items (eggs and dairy) are going up and meats will follow. “Consumers are going to pay the piper. How bad it gets will depend on how bad the disaster in the meat sector gets — if there’s over-contraction due to financial instability, meat prices could rise dramatically,” he said.
Both Buhr and Preisler suggest that the “real winner” today is the person who owns land, whether they be producer-owners or absentee owners, since the combinations of high oil prices, renewable energy demands and a significant ramp up of consumer demand for more and better food in China and Asia has in fact ramped up land prices for everyone.
Preisler said, “This is still the best place in the world to raise pigs. However, if we see significant reductions in livestock numbers because of high feed costs, this ultimately catches the grain farmer as well.
“Already we hear more comments about ethanol plants not being profitable at these high corn prices. So there will be some reshuffling within the hog industry, perhaps within the corn industry, and even within the renewable energy world.”
Right now information changes daily relative to planting reports on what crops are getting planted and where, are sow liquidations bumping up, are pork exports still booming, is consumer demand for pork products strong, is the weather looking “right” for the growing season, all these and more factor into this question of when will the hog cycle recover.
Buhr said, “I’ve been concerned this price increase in crops isn’t really good for anybody — including grain farmers. Price instability is very dangerous. We’re just getting started and it could get very ugly. We’re seeing it play out on a global basis in food inflation and other ways. We’re already seeing food riots. We’re also seeing it play out in grain elevator pricing and eventually we’ll see it play out in land prices.
“The energy markets, low grain stocks and growing demand have been fundamental to this. This is the first macro-economic market we’ve had since the 1970s and ’80s, and the big difference is it’s now a global macro-economic market. If anybody tells you they know what’s going to happen next, they’re just whistling past the graveyard.”
Minnesota is the nation’s No. 3 pork producer, with 2,500 farms raising hogs and more than 20,000 jobs in hog production and pork processing. By one estimate, the U.S. pork industry could lose as much as $3.5 billion this year.

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