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Pork Commentary: Liquidation is underway

by 5m Editor
23 January 2008, at 10:13am

US - This week Jim Long reports on the Minnesota Pork Congress in Minneapolis. The US industry is in a state of flux, with significant rationalisation predicted from some corners. Here he notes some key observations from the meeting.

  • Producers who were at the Congress are the one planning to survive. The ones that are quitting did not come. It was a focused group, but it was one tilted towards digging down and keeping going.
  • Liquidation has begun. We will now find out how many sows can be killed a week. In discussion with sow slaughterers and sow producers, we learned that the sow slaughter is committed three weeks out. Sows were touching 8 - 9¢ lb. One sow buyer was offered a herd for free if they would take ownership immediately. They declined, as they had no place to go with them. $5.00 corn has triggered a huge liquidation. Losses are mounting. Some people see no future and some cannot take the losses.
  • Losses of $40.00 per head are common fodder of conversation. Some are hedged or bought ahead or grain, soy meal and hogs. Most are not. We heard from production systems that told us of losses of over a million dollars a week. It’s ugly. Money is being lost at a faster rate per head than it has ever been made.
  • We believe that we are liquidating 10,000 sows per week in Canada-USA. Production is declining as rapidly as we can kill the sows. The liquidation rate could be being limited by capacity to kill the sows.
  • One feed company told us that they identified 13-15,000 sows of the customer base liquidating or on the brink.
  • A factor in liquidation is manure value. Who would have ever thought that would happen? At current fertilizer prices, the number of $130 - $140 per acre for corn land, manure values is being used. We heard of herd liquidation being planned to have two years of manure (this crop year and next).
  • We were told of 32,000 sows that are being and have been liquidated in Ontario with producer names and herd numbers.
  • A couple weeks ago, we asserted that pork powerhouses would cut back as they all look at different factors of sites, health, location, size, etc. Last week, Farmer John’s part of Hormel announced liquidation of about 10,000 sows in California. We understand that liquidation will take place over the next 16 weeks. Hormel is one of the most successful and well run companies in our industry. They certainly do not have to liquidate the site. They are doing so because it’s good business. We expect most, if not all, pork powerhouses will look at doing similar rationalisation.
  • PRRS has been ripping through southern Minnesota and Iowa. One vet told us that he had herds of 20 per cent abortions, 10 per cent sow death loss and pre-weaning mortality of 100 per cent three out of four weeks. Circo may be getting under control, but this new wave of PRRS is cutting back production. We have come to the conclusion that there will always be a new disease or disease variant. We have lived through waves of swine dysentery, parvo, app, pseodorabies, circo-virus, PRRS, etc. When you get one in control, another appears. Is this new wave of PRRS the replacement for circo? Dead pigs do not get to market.
  • We heard lots of gossip about different large production systems in financial trouble. There is speculation that a couple will go bankrupt and be liquidated. Hard to believe, but these are extraordinary times. A production system of tens of thousands of sows going to slaughter would radically tilt supply and demand.
  • Talked to some packers. They are having record slaughters. Their margins are good. It is amazing, in this scenario, that there are packers wondering where their hogs will come from in 2009. That liquidation will cut numbers radically and they will be scrambling for hogs. In a scenario like this, we find it hard to believe that some, if not all packers won’t be killing and chasing Canadian pigs, despite all the hand wringing going on over Country of Origin Labeling (COOL). Also hard to believe some packers would allow their competitors to have an economic edge from buying Canadian hogs when the supply shortfall comes.

Summary

Liquidation is underway. It is on a mammoth level. We will quickly decrease the Canadian sow herd 100,000 and the USA 100,000. Over 200,000 sows in total will cut supply and push prices. At current pork demand, we expect Feb 2009 lean hog futures will reach 90¢ and beyond. We are on track for $1.20 lb lean summer of 2009. The bigger the losses, the bigger the rebound. Producers are losing money in most parts of the world. In Europe, about 37 euro per hog ($55 per head). Corn is $8.00 a bushel. It’s the worst it has ever been there. High feed prices are touching the world. Last week, China announced price controls on meat. In Chile, $30 per head losses (a huge expansion by that country’s largest integrator has been put on hold). Brazil, like Canada, has currency appreciation relative to the US dollar, magnifying the financial difficulties.

The global production of pork, beef and chicken is going to decline quickly. Never before has so much of the world been losing so much money in hog production at the same time. We are in uncharted waters. We have never been more bullish for the future. The present is hell, but the future is heaven. There will be so few hogs; the only way to ration meat will be high prices. Always in history, high feed prices lead to high hog prices. This time it will be no different. The only difference this time is the high coming in hog prices is unfathomable.

5m Editor