Pork Commentary: Prices Profitable But Not Great

CANADA - This week's North American Pork Commentary from Jim Long.
calendar icon 13 July 2010
clock icon 5 minute read

Southern Minnesota averaged 75.29 lean per pound. This is profitable but not great. A year ago lean hogs a pound in Iowa–South Minnesota were hovering around 57 per pound. The good news is we are almost $40 per head better than a year ago, the bad news: we have a huge equity crater to fill and although we are profitable, it is not mortgage lifting levels. A year ago, the hog-to-corn ratio was around 16 while currently, it is around 23. Both numbers are a true barometer of profitability potential. Usually, the hog-to-corn ratio under 20 means red ink.

We continue to be amazed at the counter seasonal strength of cash small pigs. Early weans $45 and 40 pound; feeder pigs $65 average on the USDA report. Last Friday, the DTN–Ag data livestock margin calculation indicated you can pay $55 for a 4-pound feeder pig. The current stronger cash price of $65 is an obvious refection of strong demand and limited supply. No one pays more than they have to if they can find alternatives.

The USDA continues to revise the current corn crop projections usage and carry over. We expect at the end of the day, the only thing that will be much better is US weather the next six weeks. Rain means lower prices – no rain means higher prices. It will be volatile.

One of the factors supporting a hog price around $40 per head more than a year ago is less pork in storage with 31 May number minus 23 per cent compared to a year before. 140 million pounds less year over year. With a lower pork storage number year-over-year, the ability to take pork out of storage to keep prices down becomes more difficult.

We had some visitors from South–east Asia this past week. Market hogs are US$1.20 per pound live weight. Their market hogs are slaughtered daily as fresh pork. The fresh pork – mostly unrefrigerated – limits most import pork dynamics as local consumers buying patterns insist on fresh pork products. Feed is all imported and costing $120 per head farrow-to-finish. Dead stock is fed to crocodiles which are kept for leather production. Only the crocks bellies are used. Crocodiles prefer pork to chicken. Even crocodiles see the taste difference!

This week, we will be attending the National Pork Industry Conference in Wisconsin Dells, it will be a good indication of the mind-set of our industry. Last year, the speakers were obsessed with the idea that massive supply decreases were necessary were to return to profitability with no emphasis on demand. We did not have massive liquidation since last July but fortunately domestic and global demand has improved (H1N1 has disappeared from the news). Profits have returned anyway.

What a difference! Our industry took its lumps last year to the tune of billions of dollars with H1N1 being misnamed as swine flu. We received no government support compensation despite it having nothing to do with us. CNN was no friend of ours! Now watch CNN and their bleeding heart renditions for shrimp farmers of the Gulf. Where were CNN and other media outfits when we needed help? What they did everyday was call it swine flu. A kick in our gut. Now, shrimp farmers (farmer is obviously a subjective word) whose only interest is a boat are to get compensation?

One of the greatest businessmen of all time is Warren Buffet of Berkshire Hathaway. Recently, I read a book called The Tao of Warren Buffet written by Mary Buffet and David Clark. Some quotes:

  • 'Never ask a barber if you need a haircut.'
  • 'Forecasts usually tell us more of the forecaster than the forecast.' True enough!
  • 'There is nothing like writing to force you to think and get your thoughts straight.'
  • 'Investment must be rational. If you don't understand it, don't do it.'
  • 'If past history is all there was to the game, the richest people would be librarians.'

Obviously, Warren Buffet is an extraordinary businessman who has identified leading companies and industries for long term returns and values. One of the most interesting investments is Berkshire Hathaway's major presence in CTB (Chore–Time Brock) and Pig Tek, a hog equipment company. Buffet has made few long term investment mistakes. When we observe the significant investment in the swine equipment business, we see it as an affirmation of the potential long-term growth of the hog industry. The expected 40 per cent growth of hog production globally by 2025 will not be missed by such a shrewd investor.

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