Pork Commentary: Are We in the Swine Business or Grain Market?

by 5m Editor
17 June 2008, at 8:41am

CANADA - It now feels that we are no longer in the hog business writes Jim Long in this weeks North American Pork Commentary.

We are now in the business of weatherman, rainfall gauging, grain trader and worrier. The huge rains hitting most of the U.S. Midwest are pushing corn and soybean prices to record highs. Hog cost of production continues to rise. There is much anxiety. Losses per head are in the neighborhood of $25.00. Spot early weans were trading last week either side of $6.00 each. It’s ugly. Is there any relief in sight? As usual (we can’t help it) we are looking for the pony in this manure pile.

  • European grain production is projected to increase 14% this crop year. Europe has planted almost 6 million more acres of crops this year compared to last. Crop yields are projected to increase 9% with total European grain output up 14%. Last year 255.8 million tonnes, this year 291.3 million tonnes. This increase will cut European needs for imports and should stabilize prices. A major commodity trader told us that they expect European grain would be cheaper than the US in the coming months.
  • High grain prices have increased grain production. Canada is planting 2.5 million more acres. Australia wheat output is expected to double. We had visitors from Russia this past week with 80,000 acres of crop land and they talked about their efforts to increase yields. A Canadian finance group we talked to told us that they financed almost one billion dollars of Canadian tractors, large air seeders, etc. for Russia in the last few months. Mexico’s corn production is expected to go from 20 last year to about 25 million tonnes. Point is, we expect world grain production is growing faster than is being calculated in supply/demand models.
  • We believe world livestock production is rapidly decreasing. In March, Japan’s compounded feed tonnage decreased 4.5% year over year; a decrease of about 250,000 tonnes. You do not need feed for livestock that doesn’t exist. We expect both weights and number of livestock will continue to drop, decreasing feed consumption. US chicken weights and supply are below a year ago. Cattle and hog weights are lower. We expect this trend to increase. More intense feeder management is and will cut feed usage. The following is USDA feed usage estimates:
Feed Usage
Million Metric Tonnes
06/07 07/08
World 635 660
US 148 164
Mexico 23.4 23.28
Canada 19.45 19.14
Japan 14.88 14.27
Russia 18.6 18.78
China 105.36 106.32

We expect feed utilization is decreasing at a faster rate than being estimated.

  • We live near the Ford plant that builds Lincoln Town Cars (large gas consumers). In May 2007, Ford sold 4,600 Lincoln Town Cars. This May, they sold 850. The marketplace is rapidly adjusting to high fuel prices, just as high feed prices will do likewise.
  • Oil is at the highest price in history. If there is a big price correction (who is not cutting consumption now?), corn ethanol will be quickly challenged to cover variable costs. Plants close? Corn demand cut? We are usually bullish, but when oil and corn are at the highest prices in history, the odds of staying there are not good. My father (a corn farmer) always told me, “If it’s too good to be true, it’s probably too good to be true.”
  • US pork exports for April were nearly twice as large as they were one year ago, leaving year to date exports 52% larger than last year. These exports are caused by demand. Buyers have increased consumption and/or decreased supply. The world is cutting meat production (less feed needed). Both trends will continue.
  • We had some points from a Genesus customer on the state of the industry. We wished to share them. They are articulated better than we can.

    “For the first time in 20 to 30 years, pork producers who raise their own feed are at a strategic advantage that we have not had for a long time.”

    “The complete cycle of corn-feed-manure is still a cost effective one. We know that no one wants to raise hogs for the manure, but right now ‘it’ is a huge side benefit. When you apply 4,500 gallons of finishing manure per acre, it provides you with $150-$190 worth of nutrients.

We all see high prices are pushing technology forward in grain production. You have to look no further than Monsanto and Pioneer to see where seed corn costs have gone. Technology in seed, herbicides, insecticides, fertilizer utilization, etc. is breaking new plateaus annually. Yields are increasing on trend lines. High prices and global demand for food is encouraging fast adaptation of new yield making technology.

In the swine industry, we expect much the same will happen globally. There are approximately 70 million sows in the world. Most are just pigs with little or no genetic development. As costs rise, the economic pressures to use new genetic technology will increase. Feed costs are making feed conversions ever so important. Pig productivity is like corn yields supreme. There is a difference globally of between 2,500 carcass lbs per sow of meat per year up to 7,200 carcass lbs per sow. The difference is huge. Limited global resources are going to force productivity maximization in the search for producer survival and profits.

Adoption of advanced swine genetics is going to accelerate. Some swine genetic companies that are at the frontier of productivity maximization have a golden future. Others that are not doing the research and development science to keep advancing will flounder. Today, we see four to five pigs per sow per year average between some genetic companies. Minimum $400 per sow lifetime difference. No producer can continue to start their day so far behind and survive. It’s too hard. Magnify the difference genetically with feed conversion, growth, livability, carcass quality and grade; we can see in the marketplace that some swine genetics breeding stock, even if they were free, are too expensive.

Technology adaptation is more important that ever for both survival and prosperity. Globally and domestically, just any pigs will not be competitive compared to the new advanced swine genetics. There are good swine genetic companies and jokers. There are choices. Most businesses, including yours, have destinies based on their decisions.

5m Editor