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Pork Commentary: Global Liquidations Drive Prices and US Exports

by 5m Editor
7 August 2008, at 1:56pm

CANADA - This week's North American Pork Commentary from Jim Long.

USDA Pork Cut-Outs at New Record High

Despite US hog slaughter of almost 2.1 million head last week (actual 2091.1), about 120,000 head more than the same week a year ago, the USDA pork cut-out hit a new record high of 88.23 lb. Phenomenal export demand is fueling prices that blow by any ag-economist’s predictions for pricing at these supply levels. Thank goodness! High feed prices are leaving little profit for producers even at prices hovering around 80¢ lean. It’s also good that packers have good margin so that they can build up their reserves to pay the prices that are coming from the lack of hogs in 2009.

Europe

Several European countries have released their mid-year breeding herd inventory numbers. To keep in perspective the EU-27 countries had 15.03 million sows at the beginning of 2008. This is almost double the sow inventory Canada, USA and Mexico combined. The just released European breeding herd results reflect the carnage caused by high global feed prices and hog prices that lead to large financial losses for most of the last twelve months.

Changes in Breeding Sow Numbers
% Annual Change
Denmark -8%
France -3%
Germany -5%
Hungary -13%
Ireland -5.3%
Netherlands -6.5%
Poland -20%
Spain -8%

It is estimated that the total EU herd in 2008 was 9% smaller than in June 2007. Nine percent on 15 million sows is about 1.2 to 1.3 million fewer sows. The production capacity of over 20 million market hogs disappearing. Is there any wonder why US export demand is increasing? As Europe’s production drops, pork available for export declines. Europe’s domestic prices have also increased with market hogs bringing last week. We expect Europe’s prices will get stronger yet as supply falls further as the sow liquidation results in fewer hogs in the months ahead.

Last week we had visitors from Spain at Genesus. They told us market hogs are currently bringing $ 235 US @ 110kg. with cost of production at $ 225 US per head Everywhere we look fewer hogs on the horizon Korea, Japan, Mexico, Canada, Europe and USA. The only way to ration less supply is higher feed prices. US pork exports are taking market share everywhere. It’s cheaper. It’s available.

Liquidation in North America

Last week we read reports on slowed liquidation in North America. Maybe. Official June US sow slaughter was up 39,000 sows over last year. In our books that’s about 10,000 net sows out of the herd. That’s liquidation. Another factor is sows are so cheap compared to market hogs that many producers are hanging on to sows longer. Cash flow is king and buying gilts is a luxury to many. Net results – sows are being held (cutting sow slaughter) but gilts are going to slaughter.

Recent year over year gilt-barrow slaughter percentage data indicates 2% more gilts as a percentage of total marketings are going to slaughter. On a weekly basis we calculate 40,000 plus more gilts being marketed relative to a year ago. How accurate we are not sure, but the trend probably reflects cash flow need, holding sows (that are worth little) and lack of producer confidence. We will not be surprised if the US sow inventory is down 160,000 to 200,000 on Sept.1 compared to a year ago. That will result in 3 to 4 million fewer market hogs in 2009.

Feed

Just wonder where the economists are at that predicted $10.00 corn? Looks like its closer to $5.00. As global meat protein production declines, the corn producers who saw ethanol as their salvation will realize that they have been part of the destruction of their best customer base. Not smart business. US ag-secretary Schaefer’s decision not to allow opt out of set aside land was disappointing. The only thing for sure as land comes out of yearly commitments. US grain production will expand. A new administration, whether McCain or Obama in the US might see it differently before next year’s crop year.

Greenwood Calls for 10% Sow Herd Reduction

Recently at the National Pork Industry Conference held at Lake of the Ozarks, Missouri (A conference we went to once, but were banned from returning. Chalk it up to insecure competitors), Mark Greenwood, Ag Star’s Financial Services Vice-President of Agribusiness Capital spoke and called for:

  1. A 10% reduction in the US sow herd.
  2. The industry to reduce market weights.
  3. Large systems must lead the way, with the top 30 producers publically sharing their intentions.
  4. A viable long-term model will emerge - most likely this will be a farrow to finish model.

Mr. Greenwood’s idea that the industry should reduce the sow herd by 10% is noble. He is correct that the industry has lost 2 billion dollars in equity. Obviously supply management would work. We have 80¢ lean hogs now. Cut the sow herd 10% and we would expect $1.20 lean next summer easily when coupled with the declined total global meat supply. But, heck it’s not going to happen. No one is going to buy in until they have to. Everyone is doing the Black Bear scenario. I do not have to be the best producer (fastest) I just have to be ahead of the worst (slowest). It’s human nature.

All banks also have to take responsibility. They funded the expansion. They are accomplices to this current situation. They also want high hog prices quickly to cut their loan exposures. Banks’ worst nightmare is having to take over hog farms. It’s good in a way that there are not many who prosper in a low price scenario other than sausage makers and consumers.

Mr. Greenwood’s assessment that the top 30 producers should publically share their liquidation intentions is interesting. We expect it would mostly be organized head fakes and a game of chicken. Much like packers, many pronouncements on COOL

  1. Yes, we are
  2. No, we are not
  3. Maybe

So the end of the day no one wants to give the competitor an advantage. Not going to happen. Most are private companies and have no legal obligation to reveal business plans. It’s the way it is and won’t change.

Mr. Greenwood’s belief that the long-term business model could be farrow to finish could be correct. We are not sure. We do not see that farrow to finish is necessarily more profitable. Losses per head, whether a small pig producer or f to f are relatively in balance. The issue is that many finishers do not want to have sows. They do not want the debt, responsibility, workload or production risk. They want the return and many want the manure. We expect small pigs will be $50 to $60 plus by January. The spot market always finds the real value. As prices recover, the finishers will pay the price as they always do. There could be more farrow to finish in the future but it takes more capital and with sow units more and more being placed out of the disease risk areas of the Corn Belt, the difficulty of ownership distance has become greater. Most early wean producers do not want to be farrow to finish unless they have to and as the market changes and prices for small pigs increase, the trend will reverse in our opinion. All smart finishers are currently lining up supply for the inevitable decline in production and higher prices that are coming.

5m Editor