Market Preview: Giving Up G-Stalls Carries Consequences

US - Weekly U.S. Market Preview w/e 26th January, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 27 January 2007
clock icon 5 minute read

Smithfield Foods' announcement on Thursday that it would phase out gestation stalls in its 187 company-owned farms over the next 10 years was a surprise to many people. I believe the real shock factor came from the fact that a company that now accounts for just over 1 million U.S. brood sows (per Successful Farming's 2006 Pork Powerhouses listing) was the first to make the move. It begs the question "What will be the impact?"

Smithfield's move will have an economic consequence. This industry did not grow with stall gestation systems by accident. They exist because they work. They keep sows from hurting one another after weaning. They create a better environment for embryo implantation. They allow sow body condition to be managed on an individual basis. And, they provide a safer work environment for workers. These are all economic pluses for the modern pig production unit and virtually all of them will be lost to some degree in a move to complete group gestation systems.

Moving away from a gestation stall system will be costly for Smithfield. Beyond the significant costs of remodeling will be the loss of the lion's share of the factors listed above. Most of those can be managed and it is interesting to note that Smithfield's neighbor in North Carolina, Maxwell Foods (Goldsboro Hog Farms), has done so successfully for years. Group gestation certainly has not limited Maxwell Foods prospects -- ranking it 10th in the Pork Powerhouses listing with 76,000 sows. There is one caveat, however. Maxwell Foods uses stalls for the first 35 days after weaning. There is no indication in Smithfield's announcement that they plan to include a short stay in gestation stalls, post-weaning.

The second economic consequence is that it may force others to follow. Smithfield says that its decision was based on the desires of its customers and is not meant to force anyone else to do the same. I take them at their word. But, the fact is, other retail and foodservice customers are liable to begin the "me too" cry very soon as they see McDonald's, Wal-Mart and others begin touting a "sow friendlier" product. Intended or not, that will probably be the effect of Smithfield's announcement.

I only hope that these retail and foodservice companies are correct in their judgment of their customers' desires. The research that I have seen indicates that the vast majority of U.S. consumers don't care much about these matters. But it appears that U.S. grocery stores and restaurants will do whatever they have to do to keep that PETA guy in the carrot suit from standing in front of one of their stores. More important, they will do what must be done to prevent more serious and dangerous forms of coercion, such as the violence that has been seen in Europe from strikers. Let's hope their customers don't mind paying more to keep that from happening.

So, is this the first domino to fall or the domino that, by falling, prevents others from tipping? After the lost referendum in Arizona, it appears that animal rightists and welfarists will continue their attack on at least this production practice, on a state-by-state basis. With Democrat majorities in both houses of Congress, these activists have a fighting chance of getting some elements of their program included in the next farm bill.

I'm afraid that there are dominoes yet to fall, and my real concern is whether we can successfully defend and continue the use of farrowing stalls, whose economic importance is, I think, immense. The good thing is we can stand as the defender of the helpless baby pig.

Good News in Lean Hog Futures

On a happier subject -- take a look at the Chicago Mercantile Exchange (CME) Lean Hogs futures. We've seen a very nice rally, which shows few signs of weakening.

On Wednesday, April futures broke through two important resistance lines -- May through August all set contract life highs and October and December were within 50 points of doing so. The average of the eight 2007 contracts at Wednesday's close was $70.075. That's the equivalent of $52.55/cwt. liveweight. That price would cover all of the increase in production costs seen thus far, plus a little. Who would have thought that with corn over $4 and soybean meal near $220, we could still make a little money?

There is a catch, however. These prices are good, by any measure, but CME Lean Hogs futures for June through August (there aren't enough data to draw a conclusion about May Lean Hog futures) have historically peaked in late April. Even the October and December contracts have been near their historical peaks at that same time. Thus, the question remains: Do you sell on this rally or wait?

Producers should watch this rally closely and consider selling some hogs for summer delivery when it shows signs of running out of steam. How many times have you sold hogs for $75/cwt. (carcass basis)? I think the answer for most would be "not many." As Professor Glenn Grimes of the University of Missouri suggests: Sell a percentage and hope you're wrong because that will mean you get higher prices for the remainder. Watch prices relative to a 5- to 10-day moving average for a topping signal.

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