Market Preview: An Economist’s Reflections

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 18 June 2010
clock icon 6 minute read

Last week’s World Pork Expo was quite understandably the most positive meeting of pork producers in recent memory. Profits can do that, especially after such a long dry spell. Producers were happy to be in the business, but most are still stinging from 2008 and 2009, and the huge drains on their equity.

Still, it was easy to see optimism. Although no attendance figures have been announced, it was very likely lower than in the past. That is no indictment of the Expo, but rather a reflection of the changes in the pig-producing world.

Producer numbers are lower. As the USDA’s Farms, Land in Farms and Livestock Operations report published in February noted, there were 71,450 hog operations (i.e., farms on which there was a pig on 1 December) in 2009. That is 2,300 fewer than in 2008 and 4,000 less than in 2007. Of the current count, 63,300 were owners of hogs and pigs. There were 3,610 entities owning over 2,000 head and they accounted for 80.7 per cent of the inventory. The 3,610 owners involved 8,200 operations – the difference being contract producers at some point in the production process.

World Pork Expo was once a combined trade show and pork consumer event. Free food and a number of entertainment activities attracted a lot of non-producers. Today’s Expo is a producer-focused trade show and educational event. That is good for producers and exhibitors – many who reported some apparent pent-up demand for equipment this year. One can hold a farm together just so long with bailing wire, zip ties and duct tape!

When Will Expansion Come?

The most frequent question I heard last week was, “How long until we start expanding?” My answer is, “Not immediately, but it will probably not take as long as in recent years.” Here is why.

First, the vast majority of producers are indeed in a financial pickle. Equity losses have been massive and a good proportion of producers have put personal capital and equity at stake to stay in the hog business. An overt decision to not put more of their personal money at stake in hogs was the final straw in the Faircloth family’s decision last summer that led to Coharie Farms’ bankruptcy. Some producers made the same decision while others pledged farmland, outside businesses and even homes as collateral to weather the financial storm. I presume that most would like to get these non-hog assets free and clear once more before expanding – and their bankers may require them to do so.

Second, we have only seen three profitable months in the United States and, while profits were quite healthy in March, the forecast for the rest of this year and next are okay – but not great. 14 June Chicago Mercantile Exchange (CME) Group futures prices for corn, soybean meal and lean hogs suggest profits of just under $20/head for the rest of 2010 and just under $19/head for the first half of 2011. With the exception of the “hurry-up-and-expand-to-beat (you fill in the blank)” years of the mid-1990s, it has taken higher profit rates than that to get any significant expansion. Further, a year’s worth of profits is usually required to get expansion going.

Third, profits may have returned to the United States, but Canadian producers are still facing losses driven, again, by a strong Canadian dollar. The year-on-year rate of decline for Canada’s breeding herd increased to 5.8 per cent in April after getting to -4.5 per cent in January. I think that rate will slow some when their July numbers are published in August, but would not be surprised to see a decline near 4 per cent. So, even if the US herd grows slightly, Canadian liquidation could still push U.S-Canadian supplies lower through 2011.

But the arguments that growth is coming soon are strong as well. Among them are:

  • There are empty breeding/gestation, farrowing, nursery and finishing buildings available. One does not have to build a hog farm to start (or expand) production this time. This factor almost has to speed up the response to profits.

  • There is a lot of money sitting in cash or near-cash assets earning a return of near zero. It doesn’t take much of a return to “beat the market” right now. Further, equity markets look anything but safe after the European Union-induced selloff of the past few weeks. Some people could conclude that the pork industry is a relatively safe place to risk some of those dollars.

  • High returns attract what I call “stupid money”. A more charitable, and probably more accurate, name would be “ignorant money.” I doubt very seriously that the prospect of $20/head profits will attract those funds when the total capital requirement is now $130/head or more vs. an average of $103.50/head for the decade prior to 2008. But $40/head might turn some heads. It seems a paradox, but producers may be much better off in the long run if these profits remain good but modest.

Suffice it to say that I see no evidence of expansion yet. US slaughter of US sows as a percentage of the US breeding herd has been almost precisely the same size this year as one year ago. Gilts have frequently accounted for over 49.5 per cent of total barrow and gilt slaughter. It is very difficult to expand a sow herd when sow and gilt slaughter are both holding steady!

Good times are not here to stay, but it appears they may linger for a much-needed while.

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