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Pork Commentary: Rationlisation Inevitable, But Future Has Prospects

by 5m Editor
9 January 2008, at 9:19am

CANADA - In this week's pork commentary, Jim Long analyses the effect of the Christmas holidays. Market stability now depends on a clear run of trading for at least three weeks. Feed prices continue to cripple margins and although North American producers are in a stronger position than most, productivity and cuts are still needed to sustain pig businesses.

Last week, the holidays continued to take their toll on hog producers. Weeks with closed days for slaughter plants are usually ones that lower hog prices, especially when there are lots of hogs around. Two weeks in a row of holidays (Christmas and New Year) give the packers tremendous buying leverage. The Iowa-Minnesota lean price last Friday averaged 47.17 (35¢ lb live). That’s ugly, with cost of production at 70¢ lean or more (50¢ plus lb liveweight). Our farmer math tells us that’s a loss of $30.00 plus per head.

We need two to three weeks of no holidays to get this market stabilized and get some competition between packers for the available hogs. Positive news is that packers are making good money. Case in point, try to cancel a Saturday delivery. Packers don’t like it, and this is a sure sign of packer profitability. This is good news, because packers that make money stay in business and capacity expands. In Canada, it’s interesting that packers have gone mostly silent about not making money or potentially closing plants, probably because margins have improved. Funny, isn’t it, how making money makes some problems go away.

Another point, last week the U.S. had a one-day slaughter of 436,000, which is a new record. Profitability always increases capacity and production, just as profitable hog prices over the last three years have made more hogs. A profitable packing scenario enhances capacity and production. Packers act like producers and producers act like packers. We will not run out of packer capacity: 436,000 a day times five days is 2.180 million. Add a Saturday kill of 320,000 and that would be 2.5 million a week. In our opinion, we will never touch 2.5 million head a week next fall. Market conditions are putting a brake on continental hog supply and we will see the effects by next fall.

Productivity

Sows per Worker
Farrow to Wean
United States 340
Canada 300
Netherlands 300
Denmark 200
Germany 180
Spain 150
Japan 90
Mexico 70
Brazil 60
China 30
Russia 25

High feed costs are pushing up cost of production throughout the world. Relatively speaking, Canada and the U.S. are in the best position to withstand the high costs due to the proximity of feed, capital availability, packer efficiency, domestic and export demand.

Productivity is also a factor in efficiency and staying power. Recent reports have U.S. workers ranked as the most productive in the world. What about the swine industry? We recently came across a study that estimates the number of sows (farrow to wean) per worker in several countries.

It’s reflection of organizational skill ability. The U.S. Canada take one do what it takes five six working Brazil do, or 10 to 11 China. This is a big efficiency edge. We should be proud that our systems, worker motivation and ability make us productive in world. Over time, the most efficient, lower cost systems will always win.

Will We Cut Back

We are of the opinion that even though our industry is heavily capitalized, we will see lower hog numbers. It seems to us a fallacy that there are commentators telling us that pork powerhouses will not cut back.

It’s like making the same argument that General Motors, Ford or Chrysler will not close inefficient, money-losing plants. They don’t close them all when they’re losing money, but tough times force them to assess what they are doing.

All pork powerhouses have different size farms, age of facilities, location, productivity differences, disease levels, etc. When times are tough, these owners will look at them all and decide which ones to close or sell. There will be farms shut down for a lot of reasons. All individual decisions, but accountants always gain power in bad times. They will close farms because it makes sense where the facilities have little future and cost of production is out of line.

We expect, just like the car business, this will happen over the next few months. The collective effect, 100,000 sows will leave production in the pork powerhouses (50 powerhouses – 2,000 average). It will be done because of the brutal facts of economic reality. The pork powerhouses did not get big because they cannot figure or make decisions. Fewer hogs mean higher prices. The U.S. egg industry is heavily capitalized. Large eggs were 50¢ a dozen a year ago and producers were losing money. Large eggs are now $1.50 a dozen and producers are making record profits. Low egg prices cut production. The hog industry will see the same scenario. Always, low prices are the cure for low prices. This has always been the case and it always will be. The future is golden for all that have the capital and courage to stay engaged.

5m Editor