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Dale Miller, Editor,
National Hog Farmer
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Market Preview
Higher Prices Offer Little
Relief
It is difficult to believe that spot market carcass
prices of $67/cwt. and futures contract prices in the $70s (and $80s for
the deferred contracts) can leave the pork industry in a serious
financial situation. But that’s the pickle in which we find ourselves
this spring. Decent hog prices have not, and apparently will not, keep
up with higher corn and soybean meal prices and producer losses are, to
say the least, serious.
In a meeting on Wednesday, leaders of the National Pork Producers
Council requested that Secretary of Agriculture Ed Schafer take several
actions that will ease the economic hardships facing U.S. pork
producers. Their requests included:
- A two-phase pork purchase program, the first entailing $50
million for pork produced from cull breeding stock. That would
primarily involve ground pork and pork sausage from cull sows. This is
not a sow buyout proposal similar to the program being initiated in
Canada. It is simply a recognition that the primary impediment to a
more rapid reduction of the U.S. sow herd is product movement, not
slaughter capacity. NPPC says that the expenditure will remove just
over 160,000 sows from the breeding herd.
- Authorize another $50 million to purchase pork products through the
remainder of the year. The fear is that high slaughter rates in the
fourth quarter (analysts predict just short of 31 million head for
commercial slaughter) will burden the market severely. Timing is
essential in such cases, and USDA should be ready to act, not be ready
to get ready to act (or worse – not act at all), when the time comes.
- Be flexible in interpreting and implementing USDA emergency
programs and loan guarantees to help producers purchase feed. NPPC (and
many others) fear the situation where credit issues keep a producer from
buying feed.
- Support and defend U.S. pork exports.
- Fully consider releasing Conservation Reserve Program acres that
are not environmentally sensitive, without penalty, for the 2009 crop
year.
- Fully implement the interdepartmental livestock task force.
To my knowledge, there has been no response to the letter, but the
requests are certainly reasonable and they entail actions that are
appropriate and doable.
Cold Storage Highest – Ever!
Monday’s Cold Storage report was quite a shock for most industry
observers. Frozen meat and poultry supplies were 23% higher than last
year and the largest ever recorded. Frozen pork stocks led the way at
+33% for the year. Over 657 million pounds of pork were in freezers on
March 31. The largest increase was in pork belly inventories, which
were nearly 99 million pounds or 79% higher than last year and 25%
higher than last month. Every category except variety meats showed a
year-on-year increase.
The question is whether this increase in freezer inventories is product
backing up due to large slaughter and production levels or product being
staged for export. At present, the markets would suggest the latter.
If this were a product backup, one would expect cutout values and hog
values to be falling, especially when slaughter totals are record large
for the weeks in question and are much larger than the March Hogs and
Pigs Report would suggest. But that is not the case. Cutout values
have gained $10/cwt. (to just over $66/cwt. last week) and negotiated
base hog prices have increased nearly $9/cwt. (to $61.44/cwt) in the
past two weeks – and have kept going up this week. I heard of a live
weight bid over $55 (that’s $73/cwt. carcass) this morning.
Another piece of evidence supporting the “staging” argument is that
cold storage as a percent of production is not out of line. Figure 2
shows historical data for both actual cold storage and the percentage of
monthly production in cold storage. Note that the spike in actual
inventories has not driven the percentage in cold storage beyond the
historical range. In addition, the peak in cold storage percentage
nearly always occurs in February, March or April, so the timing of this
increase is very logical as well.
The biggest storm cloud looming over this situation is the very real
shortage of shipping containers for export. That story has become
hotter this past week with several popular press articles appearing. It
is a complex situation that is driven by the weak U.S. dollar, robust
exports, falling imports (due to the weak dollar and a weakening U.S.
economy), better-paying alternatives for shipping countries, high fuel
costs and many other factors. The impact on U.S. pork exports is
anything but clear right now, but it is certainly cause for some concern
given that February saw over 20% of total U.S. production exported.
Canadian Pig Crop Report
The final piece of information relevant to the cause this week is the
Canadian Hog Statistics Report. Some highlights:
- Canada’s breeding herd is 4.6% smaller than one year ago
and the January breeding herd was revised downward from -1.9% to -3.3%.
That fits better with anecdotal evidence back in January. The Q1
Canadian-U.S. (March in U.S. and April in Canada) breeding herd is
smaller than it was one year ago.
- Total hog numbers declined by 11.7% with market hog inventories
seeing the largest drop. This reflects large market hog shipments early
in the year.
- The number of pigs under 44 lb. (20kg) is 9.8% lower than last
year, reflecting higher shipments of pigs coming south.
- Lower – but not much lower -- farrowings and farrowing
intentions. Q1 farrowings were 2.8% lower and Q2 intentions were only
1.6% lower. I expect the lower breeding herd to put more downward
pressure on farrowings as the year progresses.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
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Financial Preview
An Open Letter to Ag
Secretary Schafer
The U.S. swine industry is currently facing an
equity-drain crisis of historic proportions. Following is an economic
synopsis presented to the Secretary of Agricultural Ed Schafer in a
meeting that included the staff and leaders of the National Pork
Producers Council. It is important to note that an extensive liquidation
of swine producers, large and small, will not only dramatically impact
family farms, but will have a ripple effect on businesses relying on the
swine industry. These hog farm closures will eliminate jobs in rural
America and, in turn, affect entire communities.
At the outset, it is vital to understand the current situation has no
resemblance to the short-term hog market crisis of 1998-1999. That
situation was caused primarily by overproduction and a lack of
sufficient hog slaughtering capacity. In contrast, the current
situation is a reflection of dramatically higher feed prices.
While the U.S. swine industry is currently producing and slaughtering a
record number of hogs, it is also exporting a record amount of pork.
Demand for U.S. pork has increased domestically and worldwide. In
February 2008, the U.S. pork industry exported 20% of its supply, which
helped bolster prices. Current hog prices would be at breakeven –
which historically occurs this time of year – if pork producers’
input costs were near year-ago levels.
The dramatic issues pork producers face today are not of their own
making. Dramatically escalating feed prices encountering stagnant hog
market pricing and an unexpected increase in productivity caused this
so-called “perfect storm” in productivity.
Mounting Losses
Since October 2007, the swine industry has lost an average of $30 for
every hog slaughtered. These losses have already been incurred for
nearly seven months. During this period, we’ve seen approximately 30
weeks with an average weekly slaughter of about 2.3 million head, for a
total of about 69 million head. Weekly losses for U.S. producers are
averaging $69 million, bringing the industry’s total equity loss to
almost $2.1 billion during that seven-month timeframe.
For producers choosing to forego hedging their feed costs for 2008,
losses have approached $40-50/head. Thus, there is a significant group
of producers being economically challenged at an even faster pace than
the average.
For producers who hedged feed costs for 2008, it’s clear that 2009
will likely be more challenging because corn prices have now risen to
levels beyond any that can be justified for pork production. The
prospect of “locking in” feed costs at such levels only ensures
huge, near-certain losses on every hog produced.
Impact on a Typical Producer
A real world illustration can shed some light on the scope of the
current economic crisis. Take a mid-sized producer with 2,500 sows who
finishes about 50,000 pigs a year. Nearly a decade ago, this producer
decided to specialize in pork production because of ongoing low
feedgrain prices. This operation would be considered “typical” or
“moderate” in size in today’s swine industry. It would support
three or four families in an average year for revenue. They currently
purchase all of their feed, a model that worked well for years. The
operation is very good from a production standpoint.
In late September 2007, the operation was breaking even on the pigs they
were selling and they had no outstanding debt on the operating line with
their lender. Their available operating line was $1.3 million, based on
values of the sows and pigs owned. Since last October, this operation
has been losing an average of over $30/head. By the end of April, they
will have marketed over 29,000 hogs during the seven-month period
(29,000 @ $30/head loss = $870,000, leaving $430,000 available on his
operating line).
In addition to the nearly $900,000 this producer has lost simply
finishing pigs, he has also incurred dramatic cost increases to feed the
pigs currently in the barns – costs that have increased by at least
$20/head (25,000 head of inventory @ $20 loss = $500,000).
With the losses and the increased feed costs outlined, this producer
went from having $1.3 million of available borrowing capacity to having
exceeded his available borrowing line by $70,000 in just seven months,
and there is no relief in sight. While this situation has played out,
the cost of labor, propane, transportation, and any cost tied to energy
prices, has also escalated.
Feed-Cost Dynamics
If we compare feed costs today vs. 18 months ago, the industry is
spending, on average, $100 million more per week. The poultry producers
whom I work with face the same situation. The combined total for the
year will be over $10 billion more in extra costs, compared to a year
and a half ago. Faced with this cost-price situation, the obvious
solution would be to curtail all production immediately. However, most
producers are doing what they can to limit production. Most finishing
units are full of hogs and many have contracts for feeder pigs that must
be honored. It is important to remember, empty barns bring in no income
either.
Longer-term Economic Impact
Demand for pork is strong and expected to remain so. Even though pork
sales are excellent, the industry must and will contract because
breakeven costs far exceed what producers are receiving for their
livestock.
Supply must be reduced by at least 10% to shrink production enough to
get pork prices to a profitable level. Keep in mind, however, shrinking
supply may have unintended consequences, such as closure of older
packing plants and reducing available manure to fertilize crops (thereby
increasing crop producer’s dependence on anhydrous ammonia made
largely from foreign-produced natural gas and potash imported into the
United States, the cost of which has more than doubled in the last
year).
The economic impact of a 10% reduction in U.S. pork production extends
well beyond the impact on the pork producer. If the U.S. supply of hogs
is reduced by 10%, which equates to roughly 10 million hogs a year, the
number of sows will have to be reduced by 600,000. It is estimated that
such a reduction will eliminate 2,160 jobs for those who care for the
sows. These employees are presently paid more than a living wage in
rural America and most of them receive benefits, such as health care and
retirement plan contributions.
Further, if production declines by 10 million head, the facilities used
to raise those pigs to market weights will not be needed. This equates
to about 2,100 barns that hold 2,400 head each. A barn generally
finishes about two groups of pigs a year. Most producers have a
contract rate of about $36/pig space/year. The loss of this $180 million
in revenues for farm families means it will be difficult for those
families to remain on the farm. In addition, if the 2,100 barns have
debt on them at a 50% leverage ratio, which is probably on the low side,
there’s approximately a half a billion dollars in loans outstanding.
Those loans are likely to go into default, creating another liquidity
and credit crisis in rural America.
Other effects of the reduction in hog production include the loss of
jobs in the feed industry, packing and processing industry, lending
institutions and others who provide products and services to the entire
livestock industry. If supplies are reduced by 10 million hogs, the
suggested amount, this would likely lead to closing two processing
plants and eliminating 5,000 jobs. And, don’t forget, the economic
impacts go beyond just the hog industry. Beef and poultry segments are
facing the same negative impacts of high feed costs.
Expect More Integration
Ironically, the net effect of this cost-driven liquidity problem and
herd liquidation will be to dramatically accelerate the vertical
integration of the U.S. livestock sector. Only those with access to
public equity markets or with huge balance sheets will survive. Pork
processors will need to decide how they can insure their supply of
product as their long-time farmer suppliers go broke and their herds are
liquidated.
Processors will effectively only have two options:
- They can own all of their own livestock and vertically integrate,
passing rising costs through to consumers, thereby accelerating rising
food costs.
- They can virtually integrate by forming key alliances with livestock
producers and provide credit assistance to those producers to insure
they can keep them in business.
Based on the vertical integration that has occurred to date, the
decision for most processors is clear – if you have to provide the
credit and take the risks to keep production going, you might just as
well own the production. The swine industry cannot withstand the losses
being incurred now and for the foreseeable future without this
occurring. At a minimum, processors will work with larger producers
because of their supply numbers and they will be the survivors. This
will further hurt the small producers in rural America.
Summary
U.S. and global food prices are now rapidly rising and must continue to
do so in order for any of the protein sectors to survive. Protein
sectors with short production times, such as milk and eggs, have already
dramatically increased pricing. The poultry sector is likely to follow.
Protein sectors with longer production periods – hogs and cattle –
must also follow. The livestock sector has no means to protect all the
losses that are occurring other than the futures markets, but even if
you use them, it still equates to losses.
Food riots in developing countries and significantly higher grocery
store prices for the American consumer are already here and will
continue to accelerate. We need leaders to discuss ideas on how the
U.S. protein sectors can effectively manage and survive these difficult
times. There is no doubt that the U.S. swine industry is the most
competitive in the world today. However, despite the competitive
advantages we enjoy, the U.S. industry is not sustainable in its current
form – if revenue cannot keep up with rising feed costs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com
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Legislative Preview
Pork Producers
Ask USDA to Take Action
The National Pork Producers Council met with Secretary
of Agriculture Ed Schafer this week and asked the department to address
the pork industry economic crisis caused by rising feed costs and
tightening credit markets. It is estimated that pork producers are
losing $30-50/head, today. NPPC asked USDA to take the following
actions:
- "Use Section 32 funds for a two-phase pork purchase program.
- Phase 1 – Purchase pork products derived
exclusively from reproductive animals (i.e., sows), with product being
used for emergency food programs, food pantries, senior/elderly
programs, hunger programs or other non-commercial channels.
The pork industry is asking that USDA purchase about 50.5
million pounds of ground whole pork sausage at a cost of $50 million, or
99 ¢/lb. This will reduce the sow herd by 163,579 animals. This action
is designed to encourage existing sow harvest sows capacity. Due to sow
seasonal market conditions, some firms that harvest and market products
currently have underutilized processing capacity. There are producers
attempting to reduce and even liquidate their sow herds, which has led
to the inability to move into the channels of commerce even though
market prices are also low. The opportunity exists for purchases of
high-quality product, which can be provided to citizens of lesser means,
at a tremendous value to the government.
- Phase 2 – Make preparations for and authorize a
separate $50 million Section 32 bonus purchase of pork products as this
situation unfolds. We also suggest utilizing existing barter programs
with the department to supplement and expedite purchases.
- "Use the utmost flexibility in interpreting and implementing
USDA emergency programs and loan guarantees to help producers purchase
feed during the economic crisis. Of particular concern is the ability to
care for animals in operations where credit issues dictate potential
restructuring or closure.
- "Support and defend U.S. pork exports through all of the
department’s resources, including the Market Access Program (MAP) and
Foreign Market Development Program. Provide additional MAP support when
cooperators identify additional opportunities for U.S. pork exports.
- "Give full consideration to early release without penalty of
non-environmentally sensitive CRP acres for the 2009 crop year.
- "Fully implement the interdepartmental livestock task force,
which was authorized to examine and to address challenges facing the
livestock industry.”
One More Week for the Farm Bill — The Senate voted to extend
the farm bill for another week (until May 2). The House of
Representatives is expected to pass the bill. Meetings continue between
the House and Senate leadership to reach agreement on the tax provisions
and funding issues of the farm bill. There is a growing feeling among
members that a new farm bill is preferable to a one-year extension.
White House Calls for One-Year Extension — President George
W. Bush called on Congress to extend the current farm bill for one year.
In a statement, Bush said, “I am disappointed that Congress has
failed to put forward a good farm bill, leaving farmers and ranchers in
a state of continued uncertainty as to how they will be affected by
Federal policies.” He went on to say, “As important, the proposal
also lacks the important reforms I've repeatedly called for.” The
leadership of the House-Senate farm bill conference indicated the
President’s remarks were not helpful. Senator Tom Harkin (D-IA),
chairman of the Senate Agriculture Committee, said, “The
administration continues to dig in its heels on the farm bill by
rejecting reasonable offsets that the White House itself used for other
legislation and by now calling for a one-year extension of current law.
The President's call for an extension is just the latest example of
this administration's lack of cooperation to enact a new, stronger farm
bill.”
Petition to Keep All Non-ambulatory Cattle Out of Food Supply —
The American Meat Institute (AMI), National Meat Association and
the National Milk Producers Federation filed a petition with USDA’s
Food Safety and Inspection Service (FSIS) requesting FSIS to amend the
rules so that nonambulatory, disabled cattle are not permitted into the
meat supply in any circumstances. The petition would eliminate current
authority for a public health veterinarian to allow, in limited
circumstances, cattle that become non-ambulatory after passing
ante-mortem inspection to enter the food supply. AMI President Patrick
Boyle said, “Allowing the current rule to remain in force could
ultimately undermine the confidence of U.S. consumers and foreign
customers in markets that are proving difficult to reopen in the first
place.”
Enhanced Feed Ban Rule — The Food and Drug Administration
(FDA) has announced details of its enhanced feed rules. The final rule
amends FDA’s regulations to prohibit the use of certain cattle
materials in animal feeds. The materials include:
Entire carcass of bovine spongiform encephalopathy (BSE) positive
cattle;
- Brains and spinal cords from cattle 30 months of age and
older;
- Entire carcass of cattle not inspected and passed for human
consumption that are 30 months of age and older from which brains and
spinal cords were removed;
- Tallow that is derived from BSE-positive animals;
- Tallow that is derived from prohibited materials that
contains more than 0.15% insoluble impurities;
- Mechanically separated beef that is derived from prohibited
materials.
The rule will go into effect on April 27, 2009. South Korea has agreed
to accept bone-in and boneless products for beef over 30 months of age
with the publication of the rule.
U.S. & South Korea Reach Beef Deal — The United States and
South Korea reached an agreement that will allow U.S. beef to be shipped
to South Korea. The agreement is expected to take effect in mid-May.
Secretary of Agriculture Ed Schafer said in a statement, “Today's
announcement that South Korea has fully complied with international
trade standards regarding beef and beef products is great news for
America's ranchers and beef industry. By allowing complete market access
for U.S. beef and beef products from cattle of all ages, South Korea has
made a decision that is based on science and in line with international
guidelines. As a result of a constructive and steady dialogue, South
Korean consumers will again have access to safe, affordable,
high-quality beef at a time when global commodity prices are
tightening.” South Korea first closed its market to U.S. beef and
beef products in December 2003, after bovine spongiform encephalopathy
(BSE) was discovered in the United States. The market was reopened in
January 2006 for boneless beef under 30 months of age, but was closed
again in October 2007. South Korea was the third-largest export market
for U.S. beef and beef products with a value of $815 million in 2003.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
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