Hog Producers Predict a 'Crisis in the Making'

June 25, 2008 07:00 PM
 

via a special arrangement with Informa Economics, Inc.

Are hog producers crying wolf, or is wolf at door with one foot inside?

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


National Pork Producer Council (NPPC) officials and some industry analysts continue to make the rounds in Washington, telling Bush administration officials, lawmakers, and representatives for presidential candidates Barack Obama and John McCain that the U.S. hog industry is facing "a crisis situation" caused by an ethanol- and weather-led rise in corn/feed prices, an insufficient supply of planted acres, and high soybean meal prices all adding to the pork producer's bottom line woes.

Policy announcements sought from USDA officials. In a meeting earlier this week with USDA Secretary Ed Schafer and Deputy Secretary Chuck Conner, NPPC Board President Bryan Black and CEO Neil Dierks said that given the challenges facing U.S. agriculture in general, and the U.S. pork industry specifically, the industry needs the Ag Secretary's support for the following: :

-- CRP: An immediate release without penalty of non-environmentally sensitive acres in the Conservation Reserve Program (CRP);

-- RFS: A waiver of the Renewable Fuels Standard (RFS) mandate for ethanol, as requested by Texas Republican Gov. Rick Perry;

-- Ethanol blender credit: Elimination of a significant reduction of the current 51-cent per gallon ethanol blender's tax credit;

-- Imported ethanol tariff: Elimination or a significant reduction in the current 54-cent per gallon tariff on imported ethanol;

-- Planting flexibility: Permission by the U.S. government to allow crop producers to plant (at their own expense) a harvestable crop on those acres that could not be planted this spring due to weather conditions, even though the farmer may have collected a disaster payment on the ground -- the group's officials acknowledged this action may also require congressional approval and that they would ask lawmakers to do so.

Ag Secretary Shafer told the NPPC officials that "everything is on the table" and along with Conner, the officials listened to what NPPC and other individuals invited to the meeting had to say.

The somber facts and figures of the swine industry were detailed by Mark Greenwood of AgStar Financial Services, who noted the following industry developments:

-- Current cost of production costs today are between $155 - $160 per head
-- Current prices are $140 - $145 a head – producers are losing $10 - $20 a head
-- Corn price has increased from $5.99 on the Chicago Board of trade on May 30, 2007 to $7.27 on June 19th, an increase of $1.28 a bushel. This increase equates to an increase of close to $12 a head.
-- Soybean meal futures have increased from $341.50 a ton on May 30, 2007 to $419.50 a ton. This is an increase of $78 a ton or $5.85 a head.
-- Projected breakeven prices with current feed prices are $180-$185 a head.
-- Perspective: Every month until June of 2009 is showing losses of at least $20-$25 a head.
-- Financial losses already hefty: The swine industry has lost already $1.85 billion dollars since Oct. 1, 2007.
-- The cost of feed for the industry has increased to $115 million a week more than in December of 2006.
-- Equity drain: The average swine producer has already lost 25 percent of his equity since October of 2007.
-- More equity losses ahead: Potentially they could lose another 50-60 percent of their remaining equity and lenders will need to make difficult decisions regarding a number of operations.
-- Financing issues: The working capital needs just to finance existing operations has increased by almost $2.9 billion in the past year. This is causing hold limit issues with lenders, higher interest rates for swine producers, and operating line restraints for producers.
-- Corn supply concerns: The U S has a projected short corn crop now and rationing of the corn crop appears likely. The swine industry is using many sources of feed to reduce their need for corn. Corn has gone from 80 percent of the diet in the past down to 60 percent of the diet. It is still, however, the most important feed ingredient to the swine industry and it is vital that we have a supply of corn to feed our livestock.
-- Contraction ahead: The swine industry in the U S is the best in the world in terms of its cost competitiveness but unfortunately the number of farms will need to be reduced because financially they cannot afford to stay in business.

Two agriculture economists are assisting NPPC in trying to put perspective on the plight of the U.S. hog producer.

Dr. Steve Meyer of Paragon Economics notes the following five key factors:

-- Corn and soybean meal prices have reached unprecedented levels and have driven hog feed prices to over two times their pre-2006-crop levels. "Actual and projected costs for the corn and soybean meal to make a 16% crude protein (roughly average for pigs' life cycles) diet. These items traditionally accounted for most of the variation in diet costs but the costs of other ingredients such as fat, calcium, synthetic amino acids, vitamins and micro-minerals have risen dramatically as well. There has been a dramatic increase during June."

-- Higher feed costs suggest production costs in summer 2009 that are 80-90 percent higher than those of 2006 and before. "While hog prices have been better than expected, they have provided only one month of profits since last September. Even with Lean Hogs futures prices well above what many analysts believe to be accurate, there appear to be no profits in hog production through the summer of 2009."

-- Livestock producers cannot just increase their selling prices to cover additional costs – the industries must reduce supplies to drive prices upward. "We estimate that U.S. pork production must decline 8-10% in order to drive prices high enough to return producers to profitability. Given productivity growth, that means that the breeding herd must fall by 10-12%. About half of the reduction will come in Canada but 350,000 to 400,000 U.S. sows must be cut. This process has already started and, by all reports, accelerated the week of June 9 when flooding hit the Midwest."

-- Little, if any, of this profit challenge has been caused by pork producers. "Hog supplies did increase sharply in late 2007 when pig performance and survival were positively impacted by circovirus vaccines, administered by producers for reasons both economic and humane. Record export demand and strengthening domestic demand kept prices well above what would have been expected from the output growth, though."

-- The loss of hog producers 'will have a serious negative impact on rural America.' "A 100-million gallon per year ethanol plant employs roughly 45 workers and uses 35.7 million bushels per year. That corn would feed roughly 3.5 million hogs. One full-time employee in a modern hog production unit can produce roughly 4,000 pigs per year meaning that, if the 100-million gallon ethanol supplants hog production, 875 jobs will be lost and only 45 gained."

Dr. Robert Wisner, Emeritus Extension Grain Marketing Economist at Iowa State University, also joined the NPPC officials in their visits to powerbrokers in our nation's capital.

Check this link for a look at Dr. Wisner's PowerPoint presentation.


Comments: The NPPC this week repeated requests for USDA Secretary Schafer to take immediate action to reduce corn-for-ethanol demand and to free-up feed supplies. Reason: Losses per hog are still around $40.

We'll find out tomorrow if hog producers are responding by contracting the herd when USDA releases its Hogs and Pigs Report. According to pre-report trade surveys, traders are looking for all hogs and pigs inventory to be up 4.6 percent from year-ago, the result of a 5.1 percent bulge in market hog inventories. Breeding herd inventories, however, are expected to decline 1.4 percent from year-ago as farrowing operations draw-back production.

And contraction is expected to continue into the second half of 2008. June-August farrowing intentions are expected to be down 2.1 percent from year-ago and September-November farrowings are expected to decline 3.3 percent from year-ago. That's far from the 7 percent to 10 percent reduction in farrowings (or more) that industry reps say is needed to "fix” the liquidity drain in the hog industry.

If trade expectations are on the mark and the breeding herd comes in at 98.6 percent of year-ago levels, many industry-watchers will be left wondering what it will take to encourage even deeper contraction in the breeding herd. The most recent price spike in feed prices came after the survey period, so breeding herd liquidation may be accelerating right now, but it won't be reflected until the September H&P update.

However, deferred lean hog futures – which determine the value of most finished-hog production contracts – are still trading at a significant premium to nearby futures and at least hint at profit potential in the first-quarter of 2009. That premium in deferred futures is giving finishers hope and "staying power” to keep finishing facilities full, and feeder pig demand stronger than many expect.

So what is ahead? I talked to a few hog and cattle produces at two Pro Farmer seminars this week and they clearly made it known that feed and energy costs have already forced either them or many of their colleagues to throttle back -- perhaps significantly. As noted above, we'll see if USDA begins to capture that pain in hog country in tomorrow's and upcoming reports.

Another major issue is the coming impact on U.S. meat/food prices -- in 2009 and beyond -- if the hog, cattle and poultry industry continue to contract. This is a critical issue because any acceleration of the current liquidation will eventually lead to short- and longer-term meat price hikes.

One industry contact told me, "You better go out and buy a freezer and stock up on meat now because U.S. prices are going to rise 20 percent or higher in 2009 and significantly higher than that over the longer term as the liquidation plays out. This will not be limited to pork but also to beef and poultry."


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


 

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