Pork Commentary: Now or Never for Market Move

It's approaching 15 April and if there is going to be a major market move it better be soon. We expect this week and coming weeks the Iowa - Southern Minnesota lean price will increase an average of $4-5 a week. Last Friday Iowa - Minnesota averaged $54.67. Our position on hog supply appears to be line as last week the USA marketed 2.129 million down 135,000 head (-5 per cent) from the same week a year ago. We expect an approximate 5 per cent decline year over year in marketings to continue through the summer.

Other Observations

• The number of Hogs and Pigs coming from Canada to the USA is way down year to date, down almost one million head. Now a new dynamic is getting in play – feed costs. Canadian Producers who finish in both Canada and the USA are telling us there was a $10.00 per head feed cost advantage to finish in the USA six months ago. Now the pendulum has swung and now there is about a $15.00 per head feed finishing advantage in Western Canada compared to the USA. This obviously will encourage small pigs to stay in Canada.
  
  
• USA Pork Exports were down 8.2 per cent in February from February a year ago. The December, January, and February average is down 3 per cent from a year ago. February pork exports are up in Japan 17.1 per cent, Mexico 53.4 per cent, Taiwan 126.8 per cent, and Australia 77.4 per cent. Pork exports are down to Canada -10.2 per cent, E.U.27 -67.3 per cent, China -68.6 per cent, Korea -17.7 per cent, and Russia -37.8 per cent. We expect USA pork exports will be slightly lower than a year ago, going forward. Obviously with lower pork production there will be less pork to export. High hog prices in the rest of the world will continue to push pork into their countries.
  
  
• Canadian Packers are benefitting by a lower Canadian dollar in their cost structure. A decrease of relative cost competitiveness of 25 per cent (exchange rate change) compared to USA packers is embodying then to be more aggressiveness in World Export markets. USA Country Of Origin Labeling and overall costs are keeping pigs in Canada which will make Canada shackles full. At the end of 2009 we expect the USA’s decrease in pork exports will be significantly balanced by Canada’s increase in pork exports. A cause and effect of USA Country Of Origin Labeling.
  
  
• We do not get much sense of new sow units being planned for construction in 2009(there are some that are being finished that were started in 2008). The economics of the hog industry is brutal. Losses continue with Iowa – Minnesota at 54.67 last Friday we expect many are losing in the $30 per head range. It’s a war of attrition. We believe the industry in Canada – USA is losing net 6-7000 sows per week as producers cut back, quit, or are forced out.
  
  
• Try to get funding for a new sow unit will be really, really hard. Equity levels needed will be significant. In our estimation, part of the damage to our industry goes beyond the $20 - $30 per head losses we have experienced. The other aspect is the decrease in value on barns and equipment. Sow units are selling or are being valued at a big discount to new. Which is obviously a reflection of their capacity or lack of to make positive returns. If 7.5 million Canada – USA sows of capacity has decreased by $500 per sow. That’s $3.75 billion in lowered market value. It’s one of the reasons producers hang on. There is no exit strategy that works. You’re either dead (out of business), or alive (in business). To find a buyer for your sow farm is near impossible at anything but a huge discount. So for most of us it means soldier on. We have little choices. As one producer explained, it’s the Black Bear Theory. It goes like this, “You and I are in the woods. We come upon a Black Bear. Bear chases us. I don’t have to run faster than the bear. I just have to run faster than you.“ Welcome to the Darwinian world of hog production.

Summary

We are optimistic in the near future as we see rapid hog price appreciation coming. USA pork production will be down year over 20 million pounds per week (it was last week). USA chicks placed a week ago were down 14 million chicks from a year ago. USA cattle on feed down 5 per cent. There will be less of all meats, the last time that poultry, beef, and pork were down was during the recession of 1975. In 1975 hogs averaged 47.10 liveweight and prior to the 1973-1975 recession the highest price USA hogs ever achieved for a year was $24.80 average. It was over forty years ago that all meat protein sources were down at one time. We are in mostly unchartered waters. We believe the dynamics of less total meat availability and the pull of global meat demand will push lean hog prices to profitable levels by mid – May. It is soon.