Pork Commentary: Thoughts on the Industry06 December 2012
CANADA - We have been reflecting on some of the ongoing genetics in the swine industry, writes Jim Long.
- When you look at the cold hard facts of feed costs relative to hog prices, it’s hard to point at a scenario of a lucrative industry. Currently farrow to finish producers will be losing about $30 per head. The total plus/minus of profits and losses leads to negative equity gains over the last two years in our opinion.
- Compound the raw market numbers for producers who have catastrophic health breaks like PRRS and the negative scenario on the equity balance sheet is even greater. We have been told PRRS break costs about $200 per sow e.g. 2500 sow unit = $500,000. When you know some producers have annual catastrophic breaks, you wonder how they can continue.
- The equity damage to producers with sow units is also being magnified by the huge discount that existing sow units have in the marketplace. Sow units ten years old at 20% of replacement value is far greater that the depreciation the existing infrastructures have had. The low value of sow units is in itself a limit for producers to exit the industry. There are really two options for some sow and farrow to finish unit owners – continue bleeding money or quit at a discount. Cruel but simple.
- The producer whose business model has been grow their own feed and feed it to hogs probably has a better position. Last week we asked one of our genetic customers if when they look at their whole farm costs and income; have they really had it any better? What we meant was hog price, cost of growing corn, use of manure on own cropland, increased value of land. Was the whole farm income and equity better? The guarded answer? Yes, its’ the best ever. In this farmers case he had great crops in 2012 but we wonder if producers who had poorer crops but had crop insurance wouldn’t answer also in the affirmative.
- New Sow Units being built have been few over the last five years. In some areas zero have been built. The infrastructure continues to age. The cost of maintaining these ever aging barns continues to accelerate. What as an industry are we going to do when the reality of locked in timelines for alternate Sow housing is upon us? We understand alternate sow housing will cost either side of $300 per sow in existing buildings. 7 million sows USA-Canada X $300 (we know all don’t need new sow housing) = 2.1 Billion dollars. That’s a lot of coin, how many producers won’t do it in existing buildings that are already 20-30 years old? In Europe there are expectations of 10-20% of production quitting due to laws regarding sow housing. If this same per centage were to happen in North America it would be a huge market mover.
- We continue to believe sow herd liquidation is ongoing. A hog to Corn ratio of 10 to 1 has always and will always lead to liquidation. We continue to see weekly sow marketings in the 65,000 a week range which to us indicates liquidation (anything over 55-57,000 per week). Gilt sales are very tempered with the inferior genetic companies desperate for cash offering gilts at prices that are at levels that will insure their continued lack of investment in genetic development. Our experience in Swine Genetics tells us cheap gilts and their non-competitive performance is usually a sign of a genetic company’s last gasp before they go in the dust bin of genetic company history.
- As we look at the total picture the current USDA cash early wean price of $56, up from $8 in mid-September reflects lack of supply more than a euphoric demand. Buyers are holding their nose’s hoping they can make money at $56. It’s the lack of supply, due to the seasonal drop in production and what we think is 200,000 sows gone (USA-Canada) out of production since June 1st. We continue to expect summer of 2013 will have the highest US hog prices in history.
- The proverbial line “The dog runs until it hits the end of its chain!” is the US Cattle industry. The US Cattle inventory is the lowest in sixty years. Drought and lack of profits have continued to shrink its production base. When the US industry finally settles, the degree of beef available will be down a minimum 20 lbs. per capita from its peak. Less beef will be positive for Pork Prices. Why? You can’t eat beef that doesn’t exist and the beef price will continue to soar pulling pork higher. Big Question – When does the dog hit the end of the chain? If in 2013 – hog prices will be stronger yet.
- Conventional wisdom is sometimes wrong. The scenario now is for high grain market prices for a long time. The 2012 US corn crop was 13 per cent smaller than 2011 but prices are 25% higher. Doesn’t take much difference in supply to effect prices significantly. Seems to us it should work both ways. Odds of two years in a row of drought are not high. We expect due to high grain prices the world will plant the largest area of cropland in history. High grain prices = fertilizer, better seed, insecticide, better equipment etc. = potentially and probably more grain.
Those are our observations/predictions, we will have to wait and see what 2013 actually brings us.
|Author: Jim Long, President & CEO, Genesus Genetics|
please take the time to visit their website at
The opinions expressed in this commentary are entirely those of the author and can not taken to represent the views of ThePigSite.com, its owners or its management.