US Pork Producers Slow to Liquidate

US - When 1998 and 1999 are mentioned to pork producers, they show visible signs of grief, explains Purdue University’s Chris Hurt, but losses for 2007 to present have been twice as much, yet there has not been near the liquidation.
calendar icon 16 October 2009
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The agricultural economist compares the equity lost during the two devastating periods to the pork industry, says Livestock Roundup.

“Using estimates of losses in the 1998 and 1999 disaster, a 10,000 head per year producer would have lost $213,000 during seven quarters, beginning in the first quarter of 1998,“ Professor Hurt said. “In contrast, the first seven quarters of losses in the modern period, from the fourth quarter of 2007 through the second quarter of 2009, are estimated to accumulate to $315,000 for the 10,000 head per year producer.

“Unfortunately, forecasts predict losses to continue for three additional quarters, through the first quarter of 2010. This means total losses could rise to $396,000, making the downturn both longer and more severe than in 1998 and 1999.“

However, the amount of equity lost depends on the financial position of each producer, Professor Hurt said.

When comparing the two time periods, Professor Hurt noted that producers have been much slower to reduce the breeding herd this time.

“In the past two years, the US breeding herd has dropped by just 3 per cent,“ he said. “But from mid-1998 to mid-2000, the breeding herd dropped 10 per cent.“

In trying to explain the slower rate of liquidation, Professor Hurt offers four possible reasons: feed costs, exports to China, industry structure and a long profitable period.

“This time the industry’s losses have primarily been related to much higher feed prices,“ Professor Hurt explained. “Perhaps producers were not convinced that feed prices would remain high after their dramatic increase in late 2007.“

He also said there may have been a miss-reading of the pork export surge in the spring and early summer of 2008, which was primarily driven by China and a cheap dollar.

“That surge was the primary stimulus for live hog prices moving from $39 in March 2008, to $58 in May and to highs of more than $60 in August,“ Professor Hurt said. “Prices that high meant $5 per bushel corn was not as big of a threat as earlier perceived and unfortunately this delayed breeding herd liquidation.“

Looking back, Professor Hurt said the export surge was a onetime unique event. Exports have returned to much lower, but more normal levels.

Another factor leading to slow downward herd adjustment could be industry structure, Professor Hurt said.

“The industry has never had to make such a large downward adjustment with such a concentrated set of producers,“ he pointed out.

The final reason for the slow reduction, given the current string of losses, could be that the profits and net worth accumulated from 2000 until the final quarter of 2007 were large.

“Taking the hypothetical 10,000 head per year producer’s accumulated returns from the start of 1998, losses accumulated to $213,000 by the end of the third quarter of 1999,“ Professor Hurt said. “But then the industry returned to overall profitability for a long run and by the third quarter of 2007, the farm had overcome the losses of 1998 and 1999 and accumulated $1.45 million of profits. So a farm that has been in continuous production since 1998, with losses near $400,000 on this downturn, could be operating from a high equity base.“

This means that it’s likely not all hog farms are in financial trouble, Professor Hurt said.

He pointed out the most vulnerable to the current financial losses are those operations that have started production in the last three years, have had large expansions in the past few years, or diverted earnings from 2000 to 2007 into assets such as stocks or residential housing that plunged in value.

In looking to the future, Professor Hurt said he expects modest losses this fall, with live hog prices averaging about $40 to $42 and all costs near $45. For winter, he expects hog prices to be in the low to mid $40 range with costs near $46.

“Profits may return in the spring of 2010, with prices rising to the higher $40s and costs remaining in the $46 to $47 range,“ Professor Hurt said. “For all of 2010, I expect a modest profit of $2 to $5 per head.“

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