Pork Industry Sheds Months Of Red Ink

www.agrinews-pubs.com
Jeannie Otto
2010-06-28

MCHENRY, Ill. — Things are definitely looking up for U.S. pork producers.

“The mood is extremely positive, we’re still in a liquidation mode, which is best for the industry overall for supply, and we’re going to have nothing but better demand ahead of us as the economy recovers, no question,” said Rich Nelson, director of research at Allendale Inc., a commodity research advisory firm based in McHenry.

With the U.S. Department of Agriculture’s Quarterly Hogs and Pigs Report due to be released June 25, analysts said the industry, mired in red ink for the past year or more, is moving to profitability.

“We’ve had some nice profits, actually the biggest profits I’ve ever seen in the hog industry certainly in recent years here anyway,” said Darrell Mark, University of Nebraska Extension livestock marketing specialist.

Mark said an average May profit of $40 per head should throttle back to around $17 or $20 per head moving forward into the summer and fall and possibly into 2011.

Slaughter levels continue to point to the fact that the industry remains in a liquidation mode and could for some time, with producers being hesitant to add new breeding animals as they get a taste of profits.

“We’re running slaughter levels roughly about 3 percent lower than last year right now,” Nelson said. “We do expect that to further tighten up in the summer to get down as much as 4 to 4.5 percent lower than last year.”

Nelson said he expects the industry, wary of the last couple of years of losses, to stay that way for the future.

“We will still be in liquidation mode, meaning we’ll have lower slaughter and production through the first half of next year, so liquidation is still a key issue here, even if sow slaughter slows down, which it kind of has,” he said.

Mark noted that the slowdown in sow slaughter shouldn’t be taken to mean that the industry has rushed back into restocking and that industry growth could take some time.

“If you look at graph of what sow slaughter has been doing, you think, “Oh, my gosh, we’re really holding back on sow slaughter. Sow slaughter has dropped quite a bit. We must be bringing more gilts back into the herd and not culling as rapidly on sows, so the herd is growing,’” said Mark, who added that the drop in sow slaughter can be attributed to the fact that the breeding herd numbers have been down over the last few years.

He also said he foresees expansion this time to be more cautious and to take more time.

“Basically, I think the pork producer is looking more at paying down some debt and recovering from this, healing up from what we’ve just been through in the last year and a half as opposed to focusing on expansion,” he said.

A big question mark for the industry is what corn and soybean prices will do. Mark said he believes many producers learned a hedging lesson the hard way two years ago.

“Producers obviously have seen what can happen. Two summers ago, we were staring $7 corn in the face. Those things are still fresh enough in our memory that we’re more apt to protect against those things,” said Mark, who added that whether producers want to hedge on feed prices, they may now be receiving a push from banks.

“Somebody obviously has funded the huge losses we’ve had in the last few years,” he said. “It’s primarily been lending institutions continuing to supply money, and in most cases their loan covenants have increasingly tightened up.

“Whether or not producers would have done it on their own, they’ve certainly been encouraged to on the lending side,” he added.

USDA numbers showing a reduced carryout and recent heavy rains throughout the Corn Belt could be game changers.

“We’ve got quite a bit of localized flooding going on in eastern Nebraska, eastern South Dakota, western Iowa and down through Missouri and in Minnesota,” Mark said.

“It’s a little bit too early to tell how many low spots are completely drowned out, but certainly we’ve lost a little so the weather risks there are a little on the bullish side now on corn.”

“We do look for a little higher prices to show up as we see conditions fall in the next few weeks but, realistically, we’re going to look at a mild rally in corn and meal prices,” Nelson added.

Exports, long the saving grace for the U.S. pork industry, have been a little disappointing, according to Nelson, but two developments could perk up that sector.

“I think we will make inroads in China, who’s been one main question, and now the Russians are supposedly starting to buy a little bit. With those two countries in place, we do think exports will be a bullish scenario, especially going into 2011,” he said.

Mark and Nelson agreed that domestic demand for pork likely will remain steady, but they do not see a dramatic increase as consumers continue to hold back.

“We’re pretty much plugging in a stable U.S. consumer demand for both pork and beef right now,” Nelson said. “We have seen the U.S. consumer step back in the last two years.

“They’ve stepped back on their total meat purchase on a volume basis. As the economy slowly recovers, we do think we’ll be a little higher than we’re sitting right now.” But reports of the death of the U.S. hog industry, to paraphrase Mark Twain, are greatly exaggerated. While producers may have struggled and some have left the industry altogether, growth will return.

“As long as there are profits on a margin business like finishing hogs, at some point I think you are going to see some money move back into the market and some expansion take place, probably by the players who already are here,” Mark said.


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