Have We Learned From Past Mistakes?

US - Iowa-Minnesota lean hog prices gained over $3.00 per hundred last week; averaging 65.23 last Friday, up from the previous Friday’s 61.89. US pork cut-outs averaged 67.43 last Thursday, writes Jim Long.
calendar icon 17 April 2007
clock icon 5 minute read
We expect lean hog prices to push quickly over 70¢ lean, but pork cut-outs need to move up in lock step. A spread of $2.00 per hundred weight between lean hog prices and cut-outs makes it impossible for packers to make money. A solid sustainable industry needs all participants to have the opportunity of fair and equitable returns. Otherwise, everything ends up going to crap.

Have We Learned From Past Mistakes?

Many of us know and remember the financial challenges of the years 1998-2004. We felt the pain of equity disappearing and the feeling of helplessness. Most of us won’t forget. That is why most of us are cautious. We are like the generation of the Great Depression. We lived it, we know how it felt and we don’t believe it cannot happen again. This sentiment is a major reason that there is no breeding herd expansion. There are too few with the capital and courage to jump in front of the speeding freight train that is our pork industry. In 1997, few if any, could predict what happened in the next decade, but I do remember the World Pork Expo in 1998. A senior executive with one of the pork powerhouses (which did not survive under its ownership at the time), when he looked at the future in 1997 said “The problem is the women and children are dead. All that is left are the warriors. God help us. How long, when this goes bad, will it take before this industry gets righted?”

Well, it took six years, after the fall of 1998 to pound the supply to levels of sustainable profitability. Have we learned? We hope. We are all a decade older, hopefully we made mistakes, but we are smart enough not to do the same mistakes over and over. You do get to an age when there are no more rodeos. No more chances.

If you ever look at the cheerleaders of expansion, they are rarely the producer. It’s the same economists that predicted the ‘need’ for over 105 million hogs a year at the World Expo in 1998. Just before the debacle. The cheerleaders are always the people who don’t own hogs - never did and never will.

The psychological and financial damage that was wrought on many of us from 1998 to 2004 is the reason we see little expansion happening. The feed price rampage that we have experienced in the last few months, reminds us that things cannot be taken for granted. Nobody saw it coming. The only people hedged with corn are the people who grow it and since the restructuring of the industry, there is probably less than 25% of total hog production in this category.

This past week, we learned from a large organization that it has built some SEW sow units in the last couple of years. This group estimates current breakeven on a new sow unit (5,000 sows) is $38.00 for a SEW at 22.5 pigs per sow per year, when using a corn price of $3.60 per bushel. If you calculate a $5.00 return per pig – you need $43.00 a SEW to make it work.

It is any wonder the USDA report showed no breeding herd expansion since last September. It is also a reason why SEWs keep coming from Canada at an even greater rate. The US demands hogs but few will build new sow units if they can buy good little pigs.

Continental Production

To get a good measure of continental hog supply, we need to look at aggregate Canada-USA slaughter numbers.

Market Hogs (Thousand Head)
2006 2007
Canada (Jan 1st - April 7th) 5,813 5,593
USA (Jan 2nd - Aril 13th) 29,933 30,467
Total 35,746 36,060

About 300,000 head more in the two countries year to date and less than 1%. Yes, US slaughter has bounced up over the last few weeks, but if we look at continental supply, there is little growth. The most true, statistical number is slaughter totals. Every other production statistic we read or hear is an educated guess. The challenge for competitiveness between Canada and the US can be seen in the

Canadian pork exports for January.

2006 91,072 tonnes
2007 76,405 tonnes

A decline of 16.1%. As Canada’s slaughter goes down (-3.2% YTD), there is less pork for export. US pork exports are increasing and taking business away from Canadian packers, as the greater numbers of imported market hogs and feeder pigs (YTD +8.2%) from Canada fuel US packer profitability and export opportunities. A classic case of one person’s adversity is another’s opportunity.

Other Observations

World meat production is declining and you need to look no further than the decline in US corn exports to show the world’s livestock feed needs decline.

US cattle are touching $1.00 per lb and that supports pork prices and demand. Corn prices could get really interesting this fall, as we believe that world corn plantings will far exceed US corn ethanol increases (only the US, in the world, is on the corn ethanol boondoggle to any extent).

There is no net continental breeding herd expansion.

Those who grow their own feed will do quite well over the next six months.

The corn will get planted. The crop will exceed 12 billion bushels. We see strong prices through the summer with lean hogs reaching 80¢ plus.

© 2000 - 2023 - Global Ag Media. All Rights Reserved | No part of this site may be reproduced without permission.