On average, the pork industry loses from 10,000 to 12,000 hog farms annually. But this year is predicted to be different. The exodus over the next 12-18 months will likely produce one of the largest shifts in hog farm numbers the pork industry has ever seen, says an agricultural economist.
"We expect to lose a third of the hog producers as a result of the crash in hog prices," declares Ron Plain, ag economist, University of Missouri. "But it will probably take a little more than a year to wash them all out."
The big drop in hog farm numbers won't show up until the December 1999 and December 2000 USDA Hogs & Pigs Reports, he projects. By the time it is all sorted out, 75,000-80,000 hog farms are expected to remain, says Plain.
Currently there are 114,380 hog farms, based on USDA data (see Figure 1). That figure was down by 7,780 farms in 1998, a 7% drop in farm numbers from 1997.
"The 7,780 farms we lost was actually a fairly small decline and the year before, 1997, was a fairly good year, so we didn't get many people deciding to bail out of the hog business in 1998," Plain notes. Because of those huge losses in '98, producers are starting to exit the business. But it will take until the end of the year before those declines really start to show up, he says.
Purdue University agricultural economist, Chris Hurt, says what happened in '97 and '98 isn't unusual. He says the cyclical pattern of out-migration (Figure 1) shows that the most producers leave the business in high-profit years ('82, '86, '90, '96 and '97). The fewest leave in low-profit years ('83, '88, '92 and '98). Out-migration during 1980-1998 ranged from just 2% in 1992 to 21.8% in 1997.
In fact, out-migration is important in creating the hog cycle; prices rebound as producers leave the industry, he notes.
Long Liquidation Cycle That producer exodus could turn into one of the longest liquidation cycles in modern times of the hog industry, if Plain's assumptions prove true. The last four hog liquidation cycles between 1980 and 1996 lasted anywhere from four quarters to 14 quarters. (Cycles are based on quarters because the Hogs & Pigs Report is issued quarterly.) As Figure 1 vividly depicts, 1980 was the last year that there were more hog farms than the year before. And the number of hog operations has declined every year since, points out Plain.
Plain believes the current liquidation will be somewhat different than most that have claimed smaller producers. This one will claim smaller producers but it will also take with it "an unusually large share of middle-sized, older hog farmers."
John Lawrence, agricultural economist, Iowa State University, sees two liquidation scenarios. The first scenario says there will be a long liquidation cycle because of the huge loss in equity across the board, small and large producers alike who will not be able to expand as rapidly as in the past.
"So if they just hold their operations at status quo as other producers continue to get out of the hog business, we will see liquidation continue longer and, maybe, a longer period of profit to follow," he says .
"The flip side of that argument is, if you go back and look at the start of this liquidation phase, a large part of it has come from increased gilt slaughter, not increased sow slaughter," he says. Part of the reason that producers didn't send sows to town was because they were worth more on the balance sheet than they were at the packing plant.
So fewer gilts were retained, producing a drop in breeding herd numbers. Doing that, producers may be able to cut back from 105% to110% of capacity to 90-95% of capacity.
Then, as prices begin to climb, producers simply add gilts and crank up production. "We actually end up with a shorter hog cycle because we don't have to wait for new building permits or completion of construction to expand. We simply go back to pushing our existing facilities harder," says Lawrence.
Banker Backing? According to Plain, many producers who are facing financial hardships are seeing their bankers about their loans. From the Missouri producers he has talked with, the consensus is lenders plan to stick with the solid producers but don't plan on extending any new hog loans.
"I am very concerned that bankers are going to learn a lesson from this downturn in the cycle - that loaning to hog farmers is too risky," observes Plain.
Producers are periodically going to need to borrow money to remodel or put up a new building. And if they find there isn't local money available to do so, they will phase out their hog operations because they know they can still borrow money on their cattle and their crops.
Hurt also sees some danger signs from the banking community. Publicly they have said they will back producers. But privately they are not sounding as supportive, he says.
"What we saw was a historical event that we could not even have imagined, let alone predicted," he says of the hog prices in 1998. "It almost writes a new standard for what people define as what is really bad in the hog business. Bankers are starting to say the last quarter of '98 is the new standard and that is a mistake.
"To make producers plan for those kinds of low prices, is going to produce a very conservative stance amongst pork producers, especially our traditional, family-type producer," suggests Hurt. Those producers won't make any major changes in their operations until they can be sure that what we saw at the end of 1998 was an aberration. Those producers will probably wait two to three years before they make any moves to expand their operations. It will likely take that long to return to the equity position they held before the hog price bust of '98.
He comments, "The industry must learn that it cannot expand, expand, expand. It has to be done in a slow manner. This industry can only grow at a rate of 1-2%. It cannot grow at a rate of 5-10% per year and have the market absorb that production." (Production was up 9-10% last year.)
Hurt says unless corporate hog producers simply ignore economic signs of the downturn, he believes prices will rebound favorably.
Provided there is further liquidation throughout this year, hog prices should return nicely into the black in 2000. For the first year of the 21st century, he forecasts summer cash hog highs of $50-55/cwt. and a $45-50/cwt. average.