Markets were distorted this past week by the major winter storms that pounded the Midwest. Hog deliveries in the US were 1,896 million, 4.4% lower than a year ago.

There is a good chance 100,000 hogs were backed up and this will challenge price discovery for a few days. The good news is hog weights have been running significantly lower than a year ago and last week’s storm will cause only a small blip in the direction of hog prices and supply.

With May lean hog futures over $76 and last week’s Iowa-Minnesota close 62.29, we look forward to prices increasing almost $30.00 per head in the next ten weeks, taking the industry from breakeven to good profits.

Russia

This past week, we spent time with six different Russian companies that are either in, or interested in, being swine producers. Our observations:

• The government of Russia’s official policy is to double domestic pork production in the next 4 to 5 years. This will be done by increasing the sow base and increasing productivity.
• To get this accomplished, a massive building program will need to be undertaken, as the current infrastructure is both small and outdated.
• Technology uptake which includes the introduction of upgraded heath protocols, genetics, nutrition and personnel training.
• Scale of the projects are large. Russia has a tradition of production capacity, having built 20,000 sow systems 20 years ago. From what we can determine, the North American model of size and production simplification is more suited to the Russian economic evolution. This, as compared to the European model of high regulation and lack of economy of scale. That is, Denmark is quaint with its sow units of 70 head, but when an industrial group with 35,000 hectares (70,000+ acres) is looking at building swine buildings, they are discussing how many tonnes of pork a week, not how many pick up loads. These factors are compounded when you consider Russian weather is more like North America, with higher and lower temperatures compared to the soft climate of Western Europe.
• Russia also has feed grain production capacity more like the North American model. Large agrarian production bases just as North America are looking to not only produce pork as a protein source, but as part of a grain production system that utilizes manure to lower costs and increase yields.
• A sidebar to last week’s commentary about grain production in the world. Our Russian visitors all expect a significant increase in feed grain and oilseed production in 2007. Four dollars a bushel US corn is driving world grain plantings beyond comprehension. Our Russian visitors expect greater use of fertilizer, herbicide and insecticide than ever before, enhancing yields.
• Russia, historically, has been a country that has strived for self-dependence. It does not have a history of being a nation of traders. The current reliance of huge imports of pork and chicken to meet Russian domestic consumer needs is counter to national aspirations. We expect ever-increasing tariffs will go into place to protect Russian domestic protein production. We do not see Russia as a long term prospect for North American pork.
• Russia with a GDP per capita of $7,500 US spent almost 10% per capita of GDP on meat protein. In Canada and the USA, consumers spend about 2% of per capita GDP. From what we can determine, the 10% of per capita GDP that the average Russian spends on meat protein is the highest in the world. Obviously, this type of purchasing has tremendous potential for growth, as the Russian economy improves. Definitely, an interesting dynamic of plentiful land, feed and domestic demand.
• Cost of production of swine in Russia, just like North America, varies from farm to farm, but from what we can determine, an average cost of production of $1.30 US per kilo live weight (63¢ lb), would not be out of line. Feed costs are similar to the US, but the national average sow sends 13 hogs to market. Many market hogs at 240 lbs (110 kilos) have a back fat of 1.4 inch (35mm). Days to market are over 200 days. Feed conversion is lagging behind, as every 1/10 inch of back fat (2.5 mm), increase takes 22 lbs of extra feed (10 kilos). The difference between an average Russian hog and top end North American hog would be almost 70 kilos in feed (150 lbs). That is almost 15 dollars in cost difference. Currently a 240 lb (110 kilo) market hog in Russia will bring $120 per head, if its 35 mm back fat (42% lean) – a top 56% lean hog nearer to $200 per head. Obviously, it isn’t real hard to see why smart Russian operators are scouring the world to find the best technology to improve profitability.
• The Russian government is giving more than lip service to doubling pork production. Low interest, to no interest federal and regional loans are being offered to organizations with expertise and resources to get the job done. Companies with many varied interests are getting involved with the pork expansion, partially as a patriotic national duty. The Russians we have met are very proud of their President and their country’s direction.
• The Russian swine genetics industry is approximately 20-30 years behind what is currently available elsewhere. Registered purebreds are the primary product of choice for the national system due to the past scandalous behavior of European hybrid companies. The Russian government and producers want the integrity of registered certified breeding stock with genetic capacity to leap domestic production forward rapidly. Currently, crossbred gilts in Russia sell from between $200-450 US, depending on health and genetic capacity. A huge variation and a reflection of the rapid transition underway.

  Summary

  Russia has feed, land, domestic demand and now financial commitment to upgrade their swine industry. The undertaking to double domestic pork production in 4-5 years is a big commitment. We are not sure it will get doubled in this period, but it is going to be a lot larger 5 years from now. Indeed, we would not bet against it.