Typically at this time of year, we would write about making financial decisions to position your operation through the fourth quarter and better hog prices, but this isn’t a typical year. The run in hog prices beginning a couple of months ago has been counter-seasonal, to say the least. Driven primarily by slaughter numbers that were significantly off the USDA estimates provided in the September Quarterly Hogs and Pigs Report, it is clear to me that demand for pork picked up at the same time, probably replacing some beef demand.
The U.S. corn crop is coming in better than expected and has resulted in local corn prices in the $4.00 - $4.50 (Midwest) range. This resulted in better than expected fall hog profits and excellent opportunities to profit over the next 12 months, based on current futures. We could be looking at one of the best 12-month runs in industry history for profitability. The question is, how will the industry respond?
Increased Production – The first response will be one of increasing slaughter weights. Most of the clients I talk with regularly will be increasing slaughter weights by 10 lb. per head. Some of this increase is due to the profitability of adding pounds, and some will be from better performance with new crop corn, a seasonal response. I also see a continuation in productivity improvement. Larger litter size born and weaned, coupled with better survival, is a common response with many producers today. Depending on PRRS and PEDV control, this could be a growing factor in pork produced over the next couple of years. And finally, industry growth will occur. I think the industry has more discipline than ever before to match production to slaughter capacity, but our response to better profits has always been more production, and I don’t think that will change.
Rebuilding working capital and equity – Producers have, for the most part, learned that working capital is king. Using these times of profitable production to pay down debt and build a cushion ahead of the next cycle is part of the fabric of the industry. Most producers are in better shape today than coming out of other down cycles, but it is still a critical management decision most will make.
Reinvesting in the business – With operations in negative cash flow over the past year, and to some degree, the past several years of high costs, many of our clients put off reinvestment in facilities, feedmills and other systems. Reinvestment in those assets can pay dividends down the road through more efficient production or lower costs.
At the end of the day, the most efficient producers will be the ones who produce pork in the future. Those who are average or less, but still choose to expand, will be at risk. As many have learned, simply being larger will not make you better. The focus should be on becoming more efficient from a production and management standpoint. This will require some form of benchmarking your operation, making comparisons against the industry for cost and productivity, and understanding—and making—the adjustments necessary to improve.
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