The prices in Russia are strong with 270 pound (125kilos) market hogs bringing over $300.00 per head. With break evens in well run operations at about $150.00 per head the profit potential and reality is $150 a head. To put it in context we did projections on a new 5,000 sow farrow to finish unit they are building. At current prices and profits over $17 million US in profits per year – it is a different world for sure!

The coming week we will be at Agrofarm Livestock Symposium and trade show in Moscow. Russia is like the US of the early 90’s as outside production moves inside the evolution and scale of farms takes hold. We met with a Russian builder last week. He has never built a sow farm since he started several years ago under 5,000 sows per barn, made us feel small, as the new Genesus Nucleus in Russia is 1300 sows and the two multipliers are 2500 sows each. Russia is like the US – never afraid of scale!

Tyson

Last year we listened to Donnie Smith CEO of Tyson at the Wisconsin Swine Conference. He was the smartest person who spoke that day.

Last week Tyson’s first quarter pork operating income was released at $165 million, or 11.2 per cent of US $1.48 billion in sales. That is good profits and margins; it is also good for hog producers. We need packers to make money. It keeps them investing and gives them the capital to pound their way into our needed pork export markets. It also makes you wonder how reflective the US pork cut – outs are to reality. For example, last Friday US carcass cut – outs were $85.10 per pound – the National daily base lean hog carcass 53 – 54 per cent or $88.46. If you took this at face value, packers losing big money and buying hogs for more than they sell pork? Obviously Tyson’s excellent profits don’t reflect a negative margin.

Hormel Foods

Hormel Foods, one of the US's major packers and significant hog producer announced last week at its annual share holders meetings the decision to phase out gestation stalls by 2017 at its company farms.

From our perspective this is a reality that many of us will face going forward. The visual of sows in gestation stalls is hard to argue to animal welfare advocates or more importantly consumers. We are not sure it will ever be scientifically proven that sows are at a disadvantage in stalls but it doesn’t appear to matter. The consumer push is enough to have us more in that direction. In the end we will have no choice – gestation stalls will disappear whether right or wrong. Hormel is accepting that reality but being pro active on their time line.

Hormel is another Packer – Food Company doing well. For the 2011 year $7.9 billion in sales up 9 per cent, net earnings are up 15 per cent over 2011, and exports up 26 per cent in sales.

We believe one of the greatest competitive strengths of the North American pork industry is the efficiency, scale, capital commitment, and aggressiveness of our packing industry. Hormel is one of such players.

Europe

Rabobank, probably the world’s largest ag lender in a recent report expects the European Union sow herd to show a 9 per cent decline when the December reports are released. If correct, a drop of over one million sows. That is huge! In the same report Rabobank expects Euro hog prices to reach 1.75Euro per kg which is $1.04 US per pound.

There is no way one million sows out of production don’t cut supply. EU won’t have as much pork to consume or export. This is all positive for North American hog producers.

Rabobank expects US beef production to be up in Quarter 1, but down 6 per cent by the second half of 2012. Rabobank also expects US chicken production to be down 4 per cent - 5 per cent in 2012. Reduced beef supplies are expected to result in record high beef prices that will provide an umbrella for pork prices.

PRRS

There still seems to be lots of stories of further PRRS breaks cutting hog production. We need to look no further than US cash early wean prices at $61.39 and 40 pound feeder pigs at $81.74. There are fewer pigs available, more barn space than pigs pushing up small pig prices. Beyond breakevens when you look at feed and hog future prices.

Summary

Rabobank sees the same scenario we have observed for months: 2012 strong pork export sales, less US beef, less US poultry, and insignificant pig production expansion leading to strong hog prices.

If all goes, 2012 will be good!