Pork Commentary: Is There Any Relief in Sight!

CANADA - The cash market remains dismal, writes Jim Long, President and CEO, Genesus Inc. Last Friday Iowa-Minnesota averaged 49.53 lean. With breakevens around $75.00 that works out to a $50.00 a head loss. With the Canada-USA slaughter hovering around 2.7 million head a week it translates industry wide into an equity evaporation of about $130 million a week.
calendar icon 19 March 2008
clock icon 4 minute read

Unfortunately, it seems money is disappearing faster than it ever came in. The only relief in sight is with lean hog futures which closed last Friday April 55.02, May 65.65, June 70.12. June futures show a $40 a head improvement but it has been a reality since last summer.

120 day out lean hog futures have indicated higher cash prices than what we have experienced during the actual marketing period. At some point this trend will reverse but it's the billion dollar question when.

Other Observations

  • Easter is upon us. Hams are 41¢ lb wholesale. Some retail stores are featuring ham at $1.49 lb. One store we were in advertised that $1.49 was a $1.50 lb saving from regular price. Good to see someone is making money. Ham is very inexpensive meat protein and hopefully this can increase demand.

  • Last week we talked to a company that manufactures plastic farrowing and nursery floors. Up until January they were quoting several new so-farrowing barns. Since then phones have gone dead. We expect most, if not all, contemplated new sow units in 2008 will not be built. It takes a ton of capital and courage to build now. Few, if any, have that right now. We also expect most contemplating expansion will look to buy existing units.

  • Question is who will buy units. Most in the industry are getting pounded by these prices. In the last two cycle lows a large segment of production had price and cost protection with packers, feed companies, etc. This time we see little of this type of risk management. The pain is getting directly to the producer. The only risk-limiting program is those growing their own feed which is still a significant portion of the industry (20-25%) but even that leads to opportunity loss. We are of the opinion that economic circumstances are cutting the sow herd. Many barns will have lower sow numbers as gilts are not entered. There are also producers exiting. When few, if any, new barns are being built, the net effect of entry-exit will be significantly less. Obviously the marketplace cannot handle the number of hogs we are producing and give our industry a profit. The only solution is less hogs. The pain to get to that profit is heart-wrenching.

  • Are we staring to pull weights down? Latest Iowa-Minnesota weights were 267.5 lbs. At the first of year 271.2. Short-term it will put more pork in the food chain, as we pull hogs ahead. At some point though, it will mean less pork which is positive for prices. You only kill them once.

  • Packers are doing okay. The spread between carcass and cut-outs is 7¢. They are making money but not getting rich. Give them credit. They are getting them dead and moving the pork. One of North America's greatest assets in the pork industry is the scale, efficiency, capital wherewithal and aggressiveness of our packers. A week ago we had Russian visitors in a new large plant. They marveled at the speed and scale of 3 seconds a hog. Packers like this are a big reason when the dust settles in the global market meat protein shake out; we are poised to capture more world market shares.

  • Bear Stearns was the 5th largest US investment bank a week ago. Its stock was $70.00 a share. It was announced now that JP Morgan Chase will buy Bear Stearns for $1.00 a share, a $7 billion write down. A run on the bank loans that were in the US housing market are blamed. Just as in 1998 no one could have predicted the loss of control of Murphy Farms, Carroll Foods, etc by their original owners. We are in trying times. No one knows the future. Who survives the pork industry meltdown? Stay tuned.

"Courage is not the absence of fear but rather the judgment that something else is more important than fear." -- Ambrose Redmoon

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