Could Pork Producers See Prices of 1998 Again?

November 21, 2016 11:17 AM

The road of tight margins hasn't been lonely for pork producers this year, as both livestock and grains are feeling the pinch. It reminds some of the 1998 pork price collapse, fearing the industry is on the brink of another historic moment.

“Hog prices haven't reached the historic lows we saw in 1998; however, a lot of the trends in the cash market right now are similar, and a lot of the concerns about packer capacity are also there,” said Beau Peterson, Director of Supply Management, Maschhoffs, a large family-owned pork producers headquartered in Carlyle, Illinois.

What's different today than 1998? Peterson said a much stronger equity position on the producer side. While the situation is different today, the fear of 1998 is still there. 

“There's a risk that if we have 2.6, 2.7 million head of hogs that need to be killed in a given week, we could go a lot lower, because the packer can't handle that level of volume,” said Alan Brugler of Brugler Marketing.

The market could nudge lower, but analysts think the bottom is in from earlier this fall. 

“We've got a good argument for a bottom at just under $40,” said Brugler.

“I think when you look at the market overall, we've probably overdone it to the downside,” said Don Roose of U.S. Commodities. “It doesn't appear that we’re going to go over the overall capacity that we're afraid of.”

With today's prices, many pork producers are seeing red. The latest Sterling Profit Tracker shows farrow to finish producers lost $42 per head last week, which is $1 worse than the week before. At the same time, packers are seeing better margins at $46 per head. The Maschhoffs are seeing those losses first-hand.

“For the negotiated cash hogs, the industry is looking into a loss at approximately $40 per head,” said Peterson.

There is a glimmer of light at the end of the tunnel, as those losses could transition into better margins by summer.

“We have actually forecasted a loss for our 2017 fiscal year; however, if you look at the futures markets, there are some months, especially during the summer, that would indicate some positive margins are coming,” said Peterson.

“When you look out in the summer months, you're sitting over $72 a hundredweight,” said Roose. “The government says we’re going to be $57 to $62 out in those areas, so make sure you have some risk management on all the way throughout the year.”

It's a strong risk management plan helping the Maschhoffs soften the blow.

“We have an active risk management program within our business that utilizes a lot of different tools to protect our downside risk, but also leave ourselves an opportunity to take advantage of higher prices if they do recover,” said Peterson.

“We're using defensive puts and put spreads just to kind of keep a floor under prices hoping to work it a little bit higher as we come out of the fall lows,” said Brugler.

The latest Hogs and Pigs report released September 30 shows all inventory up 2 percent over 2016, but a 4 percent jump from June. Roose said an adjustment in supplies is tough because of the vertical integration of the hog industry.

“At the very least, we have to show signs that we’re not expanding, that we’re showing some signs of contraction, and then see if our demand picks up,” he said.

“If the packing capacity doesn't come on at the exact same time as the hog capacity supply to fill those new plants comes online, you end up with imbalances in the supply and demand economics,” said Peterson. “Honestly, I think that's what's been happening."

The industry projects packing capacity to improve, but that’s still a few years out.

“Current projections are that we're going to have somewhere in the neighborhood of 8 to 10 percent increase in packing capacity,” said Peterson. “For our industry, that is unprecedented growth.”

He said if the packing capacity can sync up with hog supplies, the story will be much friendlier for producers. It’s efficiency without sacrificing quality is something producers like the Maschhoffs seem to be mastering.

“Undoubtedly, we're going to see some difficult economic times over the next couple of years, but we remain very optimistic,” said Peterson.

Now it's taking the bad in stride, while preparing for the good, that will help pork producers survive. 

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