Pork Commentary: Hog Profits – As Good as It Gets!29 July 2014
US - We continue to marvel at the profits the swine industry is enjoying. Never did we ever in our wildest delusions ever believe North American profits per head could reach over $1.00 per head and $1.30 per pound, writes Jim Long.
Last September when we wrote that summer 2014 would reach $1.10/pound we were way out there, as the Chicken Little Ag - economists as the same time were predicting 89-92 cents/pound for summer 2014.
Most of you who read this commentary are capitalists, you take risk, and you know what it’s like to have your money on the line.
Taking advice from Chicken Little Ag – economists reminds us of Warren Buffet’s quote: “Wall Street is the only place that people ride in a Rolls Royce to get advice from those who take the subway.”
Last week we met with Genesus customers in South Korea. A year ago producers there were losing $50 to $80 per head. There was sow herd liquidation.
They also have got hit with PED on top of the other continual health challenges including PRRS. This has led to lower hog numbers and a market price last week of US$420 for a 240-lb. hog.
Profits are $150 per head. Feed costs are double US–Canada’s as all feed inputs are imported.
Last week South Korea reported a case of foot and mouth disease. Their first in three years. The last outbreak led to one-third of Korea’s sow herd liquidated.
Imports of pork from USA are up around 40 per cent year to date. Even with our record hog prices a market hog in the US is $150 per head cheaper than in Korea.
This leaves lots of room for pork from North America to be competitive in the Korean market while still being profitable.
Maple Leaf Foods
Last week Maple Leaf Foods – Canada’s largest packer–processor - had a producer meeting. At the meeting they gave the producers a heads up. Maple Leaf is strongly considering not allowing Paylean (ractopamine) to be fed to hogs they purchase.
We think this is a good idea. China and Russia both will not accept Paylean-fed pork. In the coming months our belief is the liquidation of four million sows in China’s herd will lead to huge export opportunities.
We believe we will need China’s market to hold our profitable market. We know there is no science that should preclude using paylean in hogs for any food safety reasons. We need the markets, it’s not about the science.
We believe the export demand will trump the production benefits of Paylean.
Mark Greenwood – Swine Industry Update at the National Pork Industry Conference
Mark Greenwood is a Senior Executive with Agstar one of the major Ag and swine lenders in the United States.
At the National Pork Industry Conference in Wisconsin he gave data and his observations on the state of the swine industry from a banker’s prospective. Some points from Mark’s talk.
- Agstar’s database have over 20 per cent of the entire US pork industry. Many different production models.
- Agstar database shows in 2013 cost of production was $67.97 and loss per head was $2.80.
- Agstar database shows in first quarter 2014 cost of production was $62.67 with loss per head of $23.54 with $20.64 of this loss coming from hedging losses.(This tells us the database of over 20 per cent of the industry lost big money first quarter due to hedging compounded by PED mortality).
- Hedging put big pressure on operating lines to cover margin calls.
Swine Operating Lines – Principle
- January 2014: $615 million
- April 2014: $1040 million
- July 2014: $769 million
Looks like to us a half a billion dollars or there about went somewhere other than producers. If this was similar across the whole industry - $2 billion to cover margin calls?
- Mark Greenwood believes 2014 will be profitable but not as good as everyone believes (best guess $15-$25 a head profits) a lot of variability due to PEDV.
- Sow – units – right – model – cost to build new is close to $1,900-$2,200 a sow space – you will need to bring in at least $500 per sow of cash in the facility or 35-40 per cent down-payment.
- In addition your cost to get a sow unit running is another $450 a sow to get weaned pig out the door – you will need another $300 a sow of capital as well to get it up and running – maximum debt per sow $150.
- Example: a 2,500-sow farrow-to-wean total cost to get up and running = $2,400 a sow =$6 million you will need $2.4 million cash or 40 per cent cash to get financing or collateral enhancement.
- Preferred size would be 5,000-6,000 sow unit (2,500 will work) – it’s all about pig flow.
- Existing sow facilities more than 2,500 sows – value is holding well even in pig dense areas - $800-$1,200 a space.
- New Nurseries $150-$200 per space, depending on size.
- New Finish Barns are $260-$280 per head.
- New Wean to Finish are $260-$300 per head.
- Existing Wean to Finish and Finishing barns asset values holding well. Nurseries not very good yet sales have been poor.
- Little or no expansion yet.
Mark Greenwood sees the numbers of over 20 per cent of the US pork industry.
Despite rocketing hog prices in 2014 and lower feed costs, the Agstar database indicates their producers lost $23.54 per head first quarter 2014.
The huge hedging costs of risk management and PEDv hammered producers. Mark Greenwood projects a 2014 average profit of $15-$25 per head far lower than the $60-$70 unhedged non-PEDV producer afected producers will make.
These limited profits in 2014 will stall potential sow herd expansions, especially with the capital needs of the large scale new sow units.
|Author: Jim Long, President & CEO, Genesus Genetics|
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