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Pork Commentary: Sow Units Sit Empty

by 5m Editor
17 August 2010, at 9:49am

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

There is no significant sow herd expansion underway. We know of dozens of existing sow units that are sitting empty. In the breeding stock business it is our job to know where the empty sow units are and sell gilts if something happens. Nothing is happening? Why?

Some Observations

  • There are excellent empty sow units and marginal ones. Some have economy of scale – some don’t.

  • It takes capital to acquire an empty sow unit but just as importantly it takes operating capital. Both long term and short term credit is extremely hard to get. Lenders have lost money in their swine accounts. There is little enthusiasm in the banking community and for debt exposure in the swine industry without significant risk aversion (equity).

  • Producers don’t have cash or resources to self fund expansion. After the $6 billion lost in equity over 30 months. 3 months of profit have not come close to replenishing the hole. Maybe at the most, 15 per cent of the equity loss has been recovered.

  • It is interesting the number of reports we have received from producers who tell us their profits over the last few months have been limited by hedging positions that was pushed on them by bankers. Their positions they were forced to take have cost them up to $20 per head in lost opportunity. Just as importantly their equity hole has not been refilled at as rapid a rate as possible.

  • Another issue is many empty sow units have gone empty under financial duress. Consequently, there are issues of ownership, debt, and control. This tangle of circumstances makes it hard or impossible to execute purchases. Tangles will get sorted out in time but it might take many months.

  • Also empty sow units that are in areas of high pig density are less attractive. Diseases have costs that at times can lead to lower productivity. Health is becoming more and more important and concerns of such affect buyers and lenders.

  • Bio – secure sow units that are empty are in areas of few people and a in a lot of cases far from markets and potential owners. To find and staff a sow unit in an isolated area is always a challenge. To own a sow unit far from where you live is in itself a leap of faith and risk.

Other Observations

  • The grain market to say the least is volatile. USDA comes out Thursday with a crop report that has record US corn production. Corn price goes up. A lot of what is happening in the markets is the reports from Russia – Ukraine of drought. As we write we are on a plane bound for Moscow. Over the next two weeks we will be visiting some of our customers in Russia – Ukraine. Producers with 100’s of thousands of hectares (acres) of crop. We will be on the ground – we will see. We will report.

  • China hog prices have jumped 20 per cent over the last few weeks. This is positive. Higher prices in China means stronger demand. Even a small percentage increase of pork exports to China – Hong Kong will support hog prices.

  • We were talking to associates in Brazil this week, hog prices in Brazil are the same as the USA. That’s good for both countries. As global competitors for many of the same export markets are lower price in either Brazil or the United States limits profit and export opportunities. Strong prices in both Brazil and the United States reflect strong global pork demand and a lower pork supply compared to a year ago.

Summary

Like many other business we sometimes work too much and are away from home far too often. It is the price we pay. Fortunately, on this trip I am travelling with my 13 year old son. Over the next 16 days he will see much of Russia, Ukraine, and the Czech Republic. It will be an eye opening experience, one that he should remember long after I am gone. Part of what we want him to see is the rapid transition and evolution in these countries - that the values and dreams of most people have no borders. Food, shelter, and to provide for a better life and opportunity covers most parent’s ambitions.