The economics of the swine industry right now are like a bad dream. You want it to wake up and not believe it is reality. Unfortunately, this is not the case. Feed prices have sky rocketed and hog prices have plummeted.
Taking a look at current economics, the average producer is losing close to $10-$15 a head today. The issue could actually get even worse if pig prices stay steady. Another concern? We have not fully seen all of the extra costs of production hitting the industry due to higher feed costs. The full effect of the higher cost of production will not hit until late November or early December. If you look at costs for pigs being sold this week, it would be our estimate that breakeven costs would be $175-$180. By the end of November and the beginning of December, breakeven costs will approach over $190 a head. December futures as of Friday morning were trading at $70.42. The economics of selling hogs in December could approach over $50 a head, which gives me flashbacks to the end of 2008. The situation for the pork industry has turned very quickly to a sea of red ink.
The Phone Has Been Ringing
I can also tell when the industry is feeling stress. The level of phone calls I receive goes up probably up three to four times. Many producers and industry people want to know the following:
How Much Liquidation is Occurring? - I hear stories that sows can’t be sold for a month and there is a back-log of people wanting to get out of the industry. This might be true but here is an opinion of what to watch for:
More liquidation from Canada – There are still a fair number of pigs coming across the border as weaned pigs or feeder pigs. Wean pigs today are trading on the open market below $10 a head. It is very hard to survive under those economic conditions. Figure 1 is a chart I receive each week, it will be something to watch going forward.
The other two things to watch, in my opinion, are the U.S. weaned pig producers and the independent producers who raise a fair amount of their own feed. We are hearing again of weaned pig producers who had contracts that are now being broken, and who feel forced to sell on the open market. Independent pork producers that have been hit hard by the drought, and who have crop insurance, might take the insurance money and liquidate their sow herd and get started later. This might be the correct decision given today’s economics.
How Do I Survive? Is this 2008-09 All Over Again?
Here are a couple of thoughts regarding how the industry will survive — although I believe that the industry will take on a “Last Person Standing,” strategy, meaning only the strong will survive.
· Cut sow numbers in all farms by 5-10% and push weaning age up by 5-10%. This will help cut overall numbers. Use the sow’s milk to raise a heavier weaned pig which will result in using a VERY expensive nursery diets.
· Cut sale weights by a minimum of 5 lb., but preferably 10 lb. The industry needs to consider this in order to manage feed supply and economics. Figure 2 shows current sale weights – the number is way too high and needs to be brought down. I believe the reason we are having such heavy slaughter numbers currently is that producers are actually trying to get ahead of this. The cooler weather is making this very difficult right now, since gains in all swine operations have skyrocketed.
The final question – is this 2008-09 all over again? I don’t know but I hope not. There’s no doubt about it, we are in some tough times ahead. The producers that survive will need to manage risk and volatility. The main thing I encourage all of you to do is be open to change to survive.