Coping With Costly Corn

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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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Overall costs rise dramatically from $112.68/hog to raise and finish a 260-lb. hog based on $2 corn, vs. $142.65 with $5 corn.

Greenwood explains that for every 10¢/bu. increase in feed costs:

• Weaned pig costs increase by 15-20¢/head;

• Market hog costs go up by 85¢/head; and

• With corn at $3.60/bu., for every tenth of a pound difference in feed efficiency, breakeven costs are affected by $2.35/hog.

Those numbers are clear examples of why the time for complacency in pork production is over. Producers must tighten their belts. Getting better is mandatory for profitability and survival, Greenwood comments.

Contract growers will be monitored much more closely on performance, he predicts.

Because building costs have also exploded, producers are going to have to do a better job with existing facilities. Study economic models that emphasize ways to improve feed conversion and average daily gain.

“Corn at $3.50 to $4/bu. will drive this industry to get better fast,” he says.

U.S. pork producers need to emulate the production benchmarks achieved by many of their global competitors.

“If we look at pigs born alive, Denmark leads the way at 12.2, whereas the United States is at 10.8,” Greenwood says. Chile stands at 11.8 (Figure 3).

“In the United States, an average 2,500-sow unit will employ 8-9 workers. In Chile, that farm will have 40 workers, including nighttime farrowing groups. That is their production advantage.”

Pigs marketed/sow/year — a key indicator of productivity — is a category where Chile leads the world, at 23.4, compared to just 17.8 for the United States (Table 1).

In Table 1, Greenwood has identified key production benchmarks for U.S. producers. In the sow herd, pigs born alive/litter should exceed 11, preweaning mortality should be under 12%, sow death loss under 10%, and replacement rates should fall below 55%.

Nursery, finishing and wean-to-finish performance benchmarks are also included in Table 1.

Greenwood stresses improvement in sow death loss has as much to do with an awareness of animal welfare as it does with improving sow longevity.

“I work with production systems today that are achieving those levels of production, so it can be done. But those are the best. To stay in this business, with higher corn and overall feed costs, those are the things you are going to have to do to lower breakeven costs and survive,” he reiterates.

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Producers with contract growers should modify their production agreements to ensure they have access to the corn the grower produces on his land to raise those pigs, Greenwood says. The producer should not expect a discount on the corn because of this linkage, however.

“The producer would still pay fair market value, but work with that grower to secure accessibility to his grain in the event corn should be in short supply,” he notes.

Should the grower balk, simply remind him that his hog contract provides an income and a job on his farm, and the nutrient value of the manure from the hogs to fertilize his corn crop.

“That's one way of being proactive and ensuring that you have a corn supply long-term,” Greenwood continues.

Mid-size family hog farmers who grow their own corn “are virtually bullet-proof” in these times of high feed costs, he observes. The key question for them is whether they have adequate farm staff or family labor to do the hog chores.

Beyond high operating costs, the biggest issue for the hog industry is who will run the hog farm in the next 20 years. “A lot of the clients I work with are between 45 and 55 years of age,” he says. If there are not adequate successors, the hog industry may undergo accelerated consolidation, he warns.

Greenwood made the following predictions in his talk at the Iowa Pork Congress in late January in Des Moines:

• The corn price crunch should keep sow herd expansion to a minimum this year, with a possible increase of 50,000 sows.

• Slaughter weights should come down, but even in 2007, that will depend on hog revenues. At mid-February, June hog futures over $75/cwt. (carcass) will bring $150 for a 200-lb. carcass, meaning even with $5 corn, cost of production comes to about $142/market hog, still providing a positive return.

• The average live hog price will be $48-55/cwt. — probably a breakeven year for many producers. Better producers will still make $10-12/head, while less efficient producers will lose money.

• Eventually, the high cost of feed will reach the retail counter. Greenwood projects the 10-11% of annual household income that U.S. consumers pay for food will rise by about 1.5%.

That price hike could impact domestic demand for pork, which has been virtually flat for decades, Greenwood says.

But his bigger concern is whether those high input costs for pork production could eventually dampen the growing dominance of the United States in the pork export market.

Click to view this table in a new window (.pdf)

Surviving in the hog industry is more about achieving a profit margin that you can live with, than it is waiting to pull the trigger when you think margins are at their highest.

Waiting until margins reach their peak to lock in prices is a gamble producers usually can't win in a commodity-based market.

Mark Greenwood of AgStar Financial Services at Mankato, MN, says his firm devised a program two years ago to help their pork producer clients manage risk and capture the upside of a volatile market.

AgStar set up separate financial lending lines for operating and hedging (marketing). In doing so, they work very closely with producers' brokers to assist them in using the futures market, and locking in a reasonable profit for their operations.

“There are not a lot of marketing programs available any more that assure you profitability, but some type of marketing plan is vital for your business,” Greenwood states.

For more details, contact Greenwood at (507) 386-4629 or log onto www.agstar.com.