If anything is for certain in 2009, it is that volatility has become the norm in the hog business, according to Mark Greenwood, AgStar Financial Services vice president of Agri Business Capital.

“I think pork producers are going to have to continue to reassess their operations and manage their risk as they go forward, because I think volatility is going to continue,” he says.

Figure 1 represents a snapshot of that volatility in recent months, as fluctuating higher feed costs have caused overall cost of production to spiral. Costs have dropped almost $40/head from their peak last August, but still produced “ugly” returns in the fourth quarter of '08 and January '09.

Every day Greenwood gets asked when the hog economy will stabilize, but he admits there are no easy answers to those questions.

He expects the roller coaster ride to continue in 2009, with the first and fourth quarters drawing red ink. Still, producers should see periods of profits in the second and third periods, he says. And, there will be periods of small profits and small losses, which means 2009 looks like a breakeven year for many.

Factors Affecting Prices

In Greenwood's view, three major factors will affect pork prices:

• Producer Action

  Canada and the overall supply of pigs in the United States: Canada's hog imports declined drastically in 2008, but the weakening Canadian dollar and strengthening U.S. dollar may mean a return of higher imports in 2009.

  By this summer, there will be less total meat protein in the U.S. food supply, including 3-4% fewer hogs.

  “Producers have cut some sows, but still managed to improve their productivity, so production has remained fairly stable,” he points out.

  Greenwood repeats his appeal from a year ago: producers still need to cull the bottom 10% of their sows. This action does two things — it reduces pig numbers and removes the least-efficient sows. The nation's sow numbers must be cut by 200,000 to 300,000 head to boost prices appreciably, he says.

  “It is going to make the rest of your business more efficient and provide a better chance of survival because the bottom 10% is not profitable anyway,” he reminds. Of course, not all of his clients have followed through on this recommendation, but he says he is “beating on them pretty hard” to take the step.

  Greenwood says a prime example of this strategy is companies laying off workers or cutting back, eliminating inefficiency. Producers need to look at their operations as a business and make the hard decisions to make them better.

• Exports: “We had a tremendous amount of exports last year, and for us to stay at that sustained pace is not a realistic expectation,” he says. The '09 forecast is for pork exports to be down at least 7%. The projections from the U.S. Department of Agriculture (USDA) suggest that it may take until 2011-2012 before exports return to the record levels of 2008.

  “Exports will still be good, but they won't be great like they were in 2008,” predicts Greenwood. Global demand for pork is escalating, particularly in the developing world. But the wild card is grains. If grain prices slide, world pork production could expand.

• Pork demand: There will be less meat protein produced in the United States in 2009 — but the big question is whether consumers will spend their dollars on meat protein, specifically pork.

  “I do think in a recession period that pork is pretty well-positioned and can be more competitive than other protein sources,” Greenwood says.

Surviving Volatility

Certainly, there has been some liquidation in the hog industry. Greenwood estimates losses averaged $20/head in 2008, with a range of $10/head profit to losses of over $30/head.

Coming on top of losses in 2007, the swine industry has lost equity nearing $2.5 billion, and most operations have lost 30-35% or more of their equity positions, Greenwood says.