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Pork producers must make adjustments and become more efficient to keep pace with the rising cost of production.

AgStar Financial Services' Mark Greenwood, vice president of the Swine Group, minces no words when it comes to the current state of the swine industry: “We have entered a new frontier where feed costs and overall production costs are higher — and we've got to get better to survive.”

This is not a time for complacency. Now is the time to build a business plan based on cost of production, emphasizes Greenwood. Take immediate steps to improve performance and devise a marketing plan that builds in a workable profit margin where possible.

Even at $4 corn, those producers who are able to keep costs in line, and take advantage of $70-plus returns on the Chicago Board of Trade this summer, will probably be able to mark 2007 as the fourth-consecutive year in the black, Greenwood predicts.

For the bottom-tier of producers — the lower 5-10% — the next 2-5 years could be tough. Some could decide it's time to exit from the industry, he says.

Position of Strength

Greenwood, based in Mankato, MN, is quick to point out that while hog economics have suddenly tightened, producers are facing these leaner times from a definite position of strength.

“I've been to quite a few meetings in the last few weeks, and I keep hearing how bad things are. Things aren't that bad. Producer owner-equity is at an all-time high of 70%. Most producers have very little operating debt,” he points out.

That's because the pork industry has enjoyed 34 consecutive months of profits — the longest profitable stretch in history.

January 2007 broke that streak with revenue averaging $115-120 cash live hog returns/head vs. costs averaging $120-125/head.

Greenwood points out that the long run of profits was built to a large degree on cheap feed costs. In 2006, $2 corn held average cost of production at $40-42/cwt.

The new cost of corn, running $3.50-$4/bu., will push average cost of production to $47-49/cwt., a $15-18 increase/hog marketed.

Figure 1 details how the increasing price of corn alone impacts feed costs in weaned pig, nursery and finishing production. At $2/bu. for corn, feed costs total $35.20 to raise a weaned pig to market weight, whereas the feed cost balloons to $58.57 with corn at $5/bu.

Figure 2 calculates feed costs, non-feed costs and the overall cost of production.

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