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Pork Commentary: Iberian Insight Re-affirms Future Hopes

by 5m Editor
26 March 2008, at 12:37pm

SPAIN - This week Jim Long is in Spain where the industry is staying strong. Sure rationlisation is occuring, but there is optimism - a trait he says the pork production industry does right to believe in.

In 2006 there were 2.7 million sows in Spain. This is the third largest sow herd in world, after China and the United States and it has some impressive statistics.

For example, spanish producers average 18.3 pigs per sow finished; 2.27; litters/female/year 2.27; and 21.3 pigs weaned/sow/year. At 81 days, pigs weigh and average of 55 lbsand the current cost of production per lb live weight is 85¢ US. The current hog market price is 83¢ US lb liveweight.

Spain's weekly slaughter numbers are on average 830,000-head - that's double the figure for Canada. It's per capita pork consumption is 136 lbs, compared with the European average of 97 lbs.

Current input costs are:
  • Corn:$8.56 per US bushel
  • Wheat:$10.96 per USbushel
  • 44 per cent soybean meal:$505 per US ton
  • 23kg (50 lb) feeder pigs are currently selling for $80 US each
And this quick snapshot of where Spain’s industry is today, shows it's treading water with extremely high feed prices.

Prices Rise, Liquidation Takes Hold


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"A quick snapshot of where Spain’s industry is today, shows it's treading water..."
Jim Long, President and CEO of Genesus.

The slaughter price for hogs eight weeks ago in Spain was €95 a kilo (66.5¢ lb US). Since then, the market has risen to €117 a kilo (82¢ lb US). The 15¢ increase has cut losses that had run $40 US per head for the last seven months to almost breakeven. Spain’s slaughter weights have in the last seven weeks decreased 7.7 lbs per head. This is a sure sign of pulling hogs ahead [109.023 kg (239.8 lbs) down to 105.53 kg (232.1 lbs)].

We were told that the industry believes liquidation of Spain’s sow herd has been between four to six per cent due to the terrible financial losses. With a beginning sow inventory of 2.7 million, this would be a decrease of 100,000 to 150,000 sows. Obviously, this would and is cutting pork production. Just as importantly, the losses of approximately $40.00 per head have been across all of Europe for the same length of time. The Common Market of Europe (EU) levels the field for all producers in the 25 countries, which can be good and bad.

The EU 25 countries, in beginning 2007, had 14.9 million sows – double the Canada-US sow inventory. If our sources are correct (we believe they are creditable) the four to six per cent liquidation would be a European breeding herd decrease of 600,000 to 900,000 sows. The rapid increase in Spain and indeed the rest of Europe’s prices is being attributed to the front end of the production decrease.

Reports from Denmark have Danish pork production, year over year, down 16 per cent, with hundreds of producers exiting the business.

Implications

The world meat protein industry has been losing lots of money. Europe, with 15 million sows, is not only a huge pork producer, but a major player in world pork exports. The losses in Europe have decreased their sow herd. European prices are now over 80¢ lb US liveweight.

Our price is under 40¢ lb liveweight. This price differential certainly should give North Americans a huge price advantage in the world pork export markets. Less pork in Europe is less pork period. The European price of 80¢ lb US will help lift our prices.

Our bottom is here, world and North America meat production is decreasing. Spain’s $8.50 US bushel corn will either make even less pork or even higher prices. We expect both. Our contacts tell us that the European breeding herd in continuing to decline.

Mexican Waves and Grain Market Falls

Our contacts in Mexico tell us some regions have seen a liquidation of 30 per cent in the breeding herd with 40 per cent of producers quitting. Mexican producers are losing $40.00 per head. We expect the Mexican breeding herd is on pace to decrease nationally 10 per cent or approximately 100,000 sows out of the national herd of one million. Less pork leads to higher prices and the total decrease of the supply in Europe and North America will create prices the highest we have ever seen.

In Grained
Last week, corn dropped 51¢ bushel, soybeans $1.45 bushel and wheat $2.28 bushel. The decrease in feed costs moved DTN’s feeder pig calculation from $32.42 to $42.19 (45 lb) in the week.

We have little opinion on what’s going to happen in the grain markets. It’s not a rational market. It has been driven by hedge funds with the same management intelligence that funded sub-prime mortgages. We do believe every arable acre will be planted in the Northern Hemisphere this year.

In Spain, we went to a meeting where the US corn ethanol phenomenon (insanity) was discussed.

Some startling points came through:
  • One full gas tank of corn ethanol is equal to the annual cereal consumption of one person in the third world (five bushels corn)
  • Ethanol corn is EIGHT times less efficient compared to ethanol sugar cane

The speaker discussed the social, political and economic implications of high food prices and the effects on world stability. Wonder what the history books will say about a society that burns its food to propel its vehicles.

Conclusion

We are positive. Liquidation has happened and is happening in Europe. Prices are over 80¢ US lb liveweight. Canada is cutting back. The US is cutting back. Mexico is cutting back. In Canada, they are projecting a further 30,000 sows being liquidated in Ontario, with the government sow liquidation program.

We understand that some Canadian packers are becoming concerned about the supply of hogs decreasing radically. In the United States, we have identified 100,000-plus sows liquidated or in the process. When the dust settles, we believe the three countries of NAFTA are on the way to knocking the herd down by 350,000 sows.

The future markets still show 73¢ in June - that’s $50.00 head better than today. Europe saw a rapid price surge and there’s no reason it won’t happen here. The worst is behind us – it’s only going to be better.

Optimism is right
We have been accused of being too optimistic. Some have told us that we are hurting the industry by encouraging producers to fight on. That we should shut up and encourage liquidation. First of all, we are not that delusionary that we believe what we say will effect the decisions of any producers. Second, the pain is real for all of us. We know the everyday stress of making a payroll, personal guarantees on loans and watching equity disappear. This is a hard and ruthless business. It’s the real world. That’s why we want to know what’s happening in our livelihood. It’s a global business and we are all affected by a global market. We won’t find the answers wandering in the back 40 acres.

We defy doom and gloom with the definite hope of the near future. Not because of irrational optimism but from our observations of what’s happening in the continental and global pork industry. We do not fear the future. We have the number one consumed meat in the world. The demand is there and, with shrinking global supply, prices are on the threshold of a huge price rebound.

5m Editor