Ever-Increasing Costs of Production

Feb 23, 2007 4:54 PM, By Mark Greenwood

Local corn markets in southern Minnesota are currently close to $3.89/bu. Corn in the Southeast is close to $4.80/bu.

The attached graphs outline what happens to cost of production as corn prices escalate from $2.00/bu. to $5.00/bu. The only variable that I changed was the cost of corn.

As you can see, for every $1.00 jump in corn costs, we increase our total cost of production by an estimated $10/head.

When corn costs $2.00/bu., the cost of production on a 270-lb. market hog is $112; when corn costs climb to $4.00/bu., the cost of product approaches $132/head, or a breakeven of nearly $49/live cwt. Looking at the markets so far this month, it appears this will be the second month in a row that we will see losses - following on the heals of 34 straight months of profits.

These higher corn prices will reveal the real differences between efficient and inefficient producers. For every 1/10th pound difference in feed efficiency, from wean to market, the cost difference is currently close to $2.35/head. Higher cost of production will separate the have's from the have not's and drive more consolidation in the industry.

Disease Issues and Death Loss -- After looking at many closeouts over the last 90 days, I've seen a large spike in mortalities across the Midwest. Most are caused by porcine circovirus-associated disease (PCVAD); it is wreaking havoc on many production systems throughout the Midwest.

A veterinarian told me this week that he has never seen health this bad in the country. I agree. I am seeing closeouts on many systems with 14-16% mortality - as an average! I also talked with a large cull-and-light-pig buyer who estimates his firm is buying 70,000 more lightweight pigs per month than a year ago. In the Midwest, today, I would estimate that death losses are up 4%, at least, which is one of the major reasons why slaughter levels are running where they are. I know that the PCVAD vaccines are promising, but there is still a limited supply available. I wonder how many hogs will be coming to market once the vaccines are more readily available. It will be interesting to see what develops.

Changes -- If you were in the swine industry on Oct. 1, 2006, you've seen the following:

Corn costs over $1.80/bu. higher and your costs increased $17-$20/head.

The Arizona ballot initiative to ban gestation stalls passed, then Smithfield Foods and Maple Leaf Foods announced they will phase out gestation stalls over a 10-year period.

Swift announced they hired J.P. Morgan to investigate selling their assets.

Smithfield Foods closes the second shift in the Sioux City, IA, plant.

Triumph Foods announced they have acquired land to build a second plant.

All I can say is WOW! We are probably seeing some of the most dynamic changes we have ever seen in our industry. I tell my clients to be aware of the changes, but also tell them to keep their eyes focused on the main goal - running their operations at maximum efficiency. If your production is better than the industry average, you will be a long-term player. If you are not, you will need to get more efficient, fast, or exit the industry. I know that is a blunt statement - but I believe it holds truer today than ever.