Pork Commentary: Prices Stay Strong Despite a Deluge of Hogs

CANADA - This weeks North American Pork Commentary from Jim Long.
calendar icon 19 September 2006
clock icon 5 minute read

The Iowa-Minnesota price last Friday averaged 68.35. A year ago the Iowa-Minnesota price was hovering around 63 cents. Year over year this is $10 per head to the good.

Last week prices held strong despite a crushing number of hogs coming to market with 2.123 million head delivered to US plants. If the hog market can hold with this deluge of hogs again next week, it will auger well for prices to stay strong through the fall. In the not too distant past a weekly kill of 2 million head usually meant producers financially were, at best, treading water but more likely going backwards. Now, it appears increased packer capacity and exports are keeping the meat moving.

As one senior packer executive told us last week, “Its one thing to get them killed, it is another to get the meat sold in a timely and profitable manner.” Reminds us of the old adage ‘sell it or smell it”. Canadian and US producers are indeed at an advantage to producers in the rest of the world. Our packing industry is modern, innovative, aggressive, well capitalized and competitive, both domestically and globally. Indeed there is no place in the world that we have traveled that we haven’t seen the presence of our packers and processors selling pork.

Expansion

It is hard to get new sow barns built. It’s hard to get them permitted. It’s hard to get them financed. It’s hard to get talented labour. This week we heard of new sow barns (farrow to wean) costing $1450 US per sow, not including land or inventory. Ten years ago they were $700 per sow. This is a big difference. Breakeven for a new sow unit to produce early weans will take a miracle to get under $32 US per head. We need capital and courage to undertake such multimillion dollar facilities. Who will take the risk, and what are the rewards? To justify such investments, the 54 – 55% of the 6 month futures that so many early wean contracts are based will never cash flow these new cost facilities. A new price list will come or they won’t get built. Until then, expect few new sow buildings.

Grain

The U.S.D.A. has projected the US corn crop to be 11.114 billions bushels, the second largest on record. There will be no shortage of corn in 2007 and feed prices should stay close to where they are.

One of the biggest factors that we all have in our cost to do business is the price of energy whether it’s for heating, transportation fertilizer, etc. Energy cost increases have hit us all. Last Friday, a barrel of oil priced in New York was $62.94. This is 18% lower than the $78.40 top in July. Some analysts are now projecting $55.00 by the end of the year. If $55.00 barrel of oil comes, it will make it easier to make money.

Another factor could be a slowing down of corn usage into ethanol. This, in turn, makes more grain available for swine production. Less demand could further help corn prices stay lower. Bottom line – the lower oil goes, the harder it is for ethanol plants to be built and cash flow. There is little upside for the swine industry by increased ethanol production taking grain out of the marketplace.

Biggest Gets Bigger

It was announced on Monday that Smithfield Foods, the world’s largest hog and pork processor has agreed to purchase Premium Standard Farms (PSF), the United States’ second largest hog producer (approx. 225,000). PSF also slaughters and produces hogs. With this purchase, the Smithfield family of hog production will exceed one million sows.

The purchase of Premium Standard Farms by Smithfield foods continues the ongoing consolidation of the swine industry. From the producer perspective this will not decrease hog selling options as PSF was integrated and bought few, if any, hogs from other producers. What it does more importantly is give one less source for purchasing pork for domestic and international buyers.

Written by Jim Long, Genesus Genetics / Keystone Pig Advancement Inc. - 19th September 2006 - Reproduced courtesy Farms.com

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