The past two years have been great for pork producers as most are back to the financial position they were prior to the downturn. Some are even stronger. This is evident as we meet with clients and we hear more and more talk of expansion. There is no doubt that there will be some expansion in 2012, with more planned for 2013.
Talk of expansion logically leads us to wonder whether there will be adequate packing capacity as we approach the fourth quarter of 2013. It is important to remember that any packer expansion or new construction will take at least two years to complete. It will also be interesting to see the effect on basis when larger hog numbers begin to flow in.
Before you plan an expansion, we encourage every producer to ask themselves where else in their operation they could invest those dollars to improve efficiencies and profitability. No doubt, such investments could be as beneficial to your operation’s returns as simply adding more hogs. And, the changes may allow you to be more competitive in the future.
If you are considering expansion or construction of a new sow unit, have you considered a pen-gestation format? If not, what is your Plan B should pen gestation be required?
Volatility Reinforced
The past few weeks have again shown how volatile profitability in the swine industry can be. Forecasted profits for the average producer for the next 12 months are now less than $12/head vs. the nearly $24/head projected just a month ago.
Will these lower profit projections curb the enthusiasm to expand? Probably not in 2012, as those plans are already in motion. However, if these lower margins persist, it might curb enthusiasm for expansion in 2013.
This change in the profit picture demonstrates how important margin management really is to the bottom line. The next few weeks will be interesting to watch as there is a seasonal tendency for margins to decline through March, but then rebound in April.
Another piece of the puzzle will be the length of the next inevitable downturn. With so many systems either integrating or fully buying into margin management, will the time frame for contraction and, therefore, the time period of sustained losses be longer than in previous downturns?
There are so many variables that impact supply and demand that it is difficult to ascertain, especially because of the amount of pork being exported. Some of these export markets can turn off in a heartbeat, but they can come back just as quickly. This reinforces why working capital is so important – even if you do an excellent job of managing your margins.
Although the outlook for the next 12 months is not quite as rosy as it once was, it is still very good. Producers are in great spirits and have a bright outlook for the future. Don’t let this affect your decision-making process when it comes to locking in margins or when you consider expanding your production system. You don’t have to look too far in the past to know how quickly things can change!
Be sure to check out the AgStar swine team’s weekly Hog Blog at AgStar.com for updates on current markets.