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A New Low

October 9, 2009
 
 

A new benchmark for pork-industry futility has been established and it's marking new territory on an almost daily basis. A decade removed from the previous low, when live hog prices dropped to $8/cwt., today's industry losses have equaled the crisis of the late 1990s. And it's not over. 

"We're not through with this thing yet and most people have more hogs than they did in 1998–99, so the impact is greater," says Iowa State University Extension economist John Lawrence. "If you look at futures prices for corn, soybean meal and hogs, it looks like it'll be sometime next summer before we see black ink," he says.

The worldwide recession plus restrictions on U.S. pork imports due to the H1N1 virus have reduced demand as feed costs escalated. Yet sow numbers are not dropping as rapidly as in previous times of crisis. All of this is leading to a restructuring in the swine industry.

"I had a rather heated discussion with someone the other day who first said we needed to reduce sow numbers, then said he didn't want to reduce finishers or packers," Lawrence says. "Well, you can't have one without the other. Given where we are right now, we either need to have a lot more demand or a smaller industry."

Lender Pressure. Now there are indications that credit availability is starting to dry up for financially strapped producers. A smattering of foreclosure reports are popping up in many Midwestern states, and the prospects for more appear to

be escalating.

"The burn rate on equity is almost catastrophic," says Daryl Oldvader, president of FCS Financial, the Missouri arm of the Farm Credit System. Normally, he says, the cyclical nature of the industry would have put producers back into the black by now, but liquidation has been slow.

"The last thing lenders want to do is foreclose," says Roger Schlitter, of Roger's Farm Financial and a former Farm Credit manager. "Lenders will ride out a situation if they can. But structurally, this market is wrecked."

One Missouri pork producer who asked to not be identified says his farm has secured financing for next year, but at nearly double the interest rate of the note that expired in July. He is negotiating with his current lender and looking for alternatives. To date, he's had no luck. The farm still has more than 50% equity, yet the lender will not budge.

"Equity is only one part of the equation. There's also working capital and risk management," says Danny Klinefelter, an economist with Texas AgriLife Extension and an Ag Texas Farm Credit Services board member. "Also, what happens to that equity

if there are significant foreclosures? The facilities they own are suddenly worth less and they could lose half of their equity almost overnight."

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FEATURED IN: Top Producer - OCTOBER 2009
RELATED TOPICS: Hogs, Pork, Economy

 
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