Pork Commentary: US Breeding Herd Expansion Insignificant

US - Hog Prices continue to languish with the US National lean carcass price average last Friday being $56.26 ($41.63 live-weight). A price, in our opinion, that will have a significant number of producers losing money.
calendar icon 5 January 2006
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Not losing a lot of money, but certainly not returns that are going to buy any condo’s in Cancun. In Canada last week the Ontario Pool Price (average) for carcass hogs was $1.14 per kilogram (Canadian dollars) or approximately .36¢ (US) per pound live-weight not including grade premiums. When coupled with an Ontario corn price of roughly $2.45 US/bushel (.75¢ higher than Iowa) it is not hard to figure why the real estate section of the primary agricultural paper in Ontario has numerous hog farms for sale. Be rest assured there is no expansion underway in Canada. Lower Hog Prices and higher feed costs are not conducive to a competitive edge.

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In the first part of 2005 we projected that the US breeding herd would be no greater on December 1st 2005 than it was on December 1st 2004. We were wrong. On December 1st 2006 the US breeding herd was 42,000 sows greater than the previous year according to the USDA. It did increase but in our own defense the increase was only 7/10 of 1%.

For you the producer the most significant part of this statistic is that despite almost two years of good profits the industry has not expanded statistically to any great degree. Indeed according to the USDA there was only 2,000 more breeding animals on December 1, 2005 than two years prior on December 1st 2003.

Possibly the tenured Ag-Economists that have been projecting breeding expansion for the last two years with their repetitive “Chicken Little“ forecasting will get it right before we all retire. Fortunately they have not hit the mark yet. Maybe in 2006, but at this point we do not see enough activity in new sow barn construction to warrant that call. We will repeat what we have said probably too many times. There are approximately 7.5 million breeding animals in production in Canada and the US combined.

On a 30 year life cycle for a sow barn we need to add 250,000 new sow places a year to maintain the infrastructure. Some factors effecting barns going out of production include economic size, building equipment degradation, environmental issues, urban encroachment (the best paying farm crop usually is new houses) and general malaise with the business. Another consideration- we are hard pressed to think of anyone in the last eight years in either Canada or the US who has been able to transfer ownership of sow operations at more than fire sale prices (relative to new barns). It has not been pretty.

The list of fire sale participants is lengthy. In Canada the newer sow units of Heartland Community Pork, Premium Pork, Acre T, Dynamic, etc were sold at a huge discount to new. Since 1998 in the US, Murphy Farms, Carrolls, Heartland, Sands Livestock, Land of Lakes, Premium Standard (original owners)etc. In Canada and the US several 100 thousand sows and facilities changed hands at a huge discount to new and in many of the situations the original builders and investors lost millions and millions of dollars. Even today after two years of good profits we are not aware of any existing facilities that changed hands at anything but a major discount to new. It seems to us there has been no financially viable exit strategy in the last eight years. (exit strategy seems to have been more akin to being carried out with your boots on).

Anyone who looks at investing millions into a new sow facility knows this reality. This factor helps keep new sow barn construction at next to zero especially when coupled with the large increase in building costs (+20-30% last four years) have pushed cost of production breakevens beyond historical market prices. Bottom-line: we believe that there will be no significant new sow barn construction in Canada or the US in the first six months of 2006. The breeding herd will not expand. We believe that there is still an underlying lack of confidence in the future of the hog industry. When coupled with the cost of new construction, environmental and labor issues it only makes it harder to get things built. What does get built will in our opinion be matched by sow herd liquidation or barn closures. Net no more sows.

Fixed asset value degradation over the last eight years should not be underestimated in the scenario going forward. As long as this continues it will discourage construction of new sow facilities and encourage the players with capital and courage to gobble up existing sow facilities at a large discount. Doing little more than shuffling the deck chairs on what could be the ghost of the Titanic. No more sows, and we expect little productivity gain. The December Hogs and Pigs Report inventory indicated no more market hogs than a year ago. More packing space is coming, while Hog Futures show prices that will be profitable through the summer. Good news, restraint in expansion will continue to pay dividends to producers. Prices will average .50¢ /lb US live-weight through the summer of 2006.

We will be at the Minnesota Pork Congress January 18 – 19. Visit us at the Genesus exhibit.

Source: Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 5th January 2006
Reproduced courtesy Farms.com

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