Pork Commentary: Hog Prices are Profitable

US - The average Iowa-Minnesota lean price last Friday was $67.21(.50¢ per pound live-weight). If the cost of production is around .40¢ per pound live-weight the profit is, give or take, $25.00 per head.
calendar icon 15 May 2006
clock icon 5 minute read

That is a lot better than it was a month ago when we were breaking even. We all know that profits of $25.00 per head don’t happen very often. The most accurate data we have indicates the average US farrow to finish operation from 1997-2005 made an average of only $3.75 per head. It is it any wonder that as an industry though we appreciate and welcome profits of $25.00 per head most of us know that the future is far from a guarantee of sustainable profitability. Our recent history makes us cautious and we see it in the numbers. How?

Sow slaughter year to date is slightly higher than a year ago. If we were seeing significant expansion we would expect sow slaughter to be lower year over year. We know there are new sow barns being built in the US. We know of few if any in Canada. We are of the opinion there will be fewer than 100,000 new sow places built in the US and Canada this year. There are approximately 7.5 million sow places in Canada and the US. One hundred thousand is less than a replacement of 1.5% of the infrastructure per year.

It is our opinion that factors such as old building, retirements, labor issues, urban encroachment, environmental, producers switching from sows to buying small pigs, etc will eliminate at least 1% of the sow herd production base a year. We see less than a 1% increase of the breeding herd by the end of the year. In essence no expansion. Canada’s exports of small pigs have increased 20,000 a week compared to last year. This is helping to alleviate need for increased sow production in the US to fill increased shackle space and help meet what appears to be insatiable demand for small pigs in Iowa-Minnesota. The shift of finishing these pigs to the US is not increasing total continental production or putting more pork into the food chain. We expect an increased number of smaller pigs to go from Canada in the future due to lower feed cost and higher hog prices in the US.

The cost of fuel is encouraging finishing production closest to the feed source, packer and where the value of manure can be utilized to its maximum. North Carolina is in a similar situation as Canada. The latest hog and pigs report shows fewer market hogs in North Carolina than a year ago. Feed price pressures, environmental issues and manure value utilization, cost of fuel and more packer options are pulling small pigs to different parts of the corn belt.

Another factor slowing down new sow barn construction is the cost of building. From what we can determine is 20-25% higher in the last couple of years. Cost of production is obviously higher with these new barns and these extra costs are not being off set by any new technology that would increase productivity. In the last decade we are not aware of any new innovation in sow barns that gives an automatic boost to productivity which would help pay the increased cost. On top of this you need confidence in higher prices now and in the future to contemplate and justify a new sow barn investment.

In our opinion disease realities and concerns are discouraging expansion. PRRS, Circovirus, PWMS are hitting some producers very hard. The specter of what these diseases and others can do to a sow herd is a discouragement for multi million dollar expansion. Unlike cattle, no one has hogs for status or fun. You have them to make money.

Bottom-line: Right or wrong we still do not believe that any significant breeding herd expansion is underway. The factors previously discussed plus some we probably can’t think of overwhelm the optimism needed to drive significant expansion. When these factors are compounded by the huge increase of chicken and beef production in the US the obvious result of total meat availability continues to weigh heavily in the meat sector. Now if we were only producing in Russia. Hogs there are currently .82¢ US per pound live-weight. Now that’s real margin opportunities. It is also a result of previous extreme low prices and subsequent swine production half of what it was 10 years ago. As always supply and demand drives prices. Location doesn’t hurt either.

Source: Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 15th May 2006
Reproduced courtesy Farms.com

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