Doing a better job of marketing in the next 12-18 months will be key to the survival of many pork producers.
Larry Sills, Premium Pork senior agent at Producers Livestock Marketing Association (PLMA) in Sioux City, IA, describes the pork market's daily changes as “steady by jerks.”
“The bottom line for a pork producer today is they have got to be more of a business person than they've ever been before,” he declares. “I have told producers for years that I don't understand how they can set back and let someone else price everything that they've worked so darn hard to produce. Remember, profit is not a dirty word!”
Certainly not a newcomer to livestock marketing, Sills spent 17 years with the National Farmers Organization before joining PLMA, a marketing cooperative organized under the Capper-Volstead Act, which essentially gives them the right to pool hogs. Producers Livestock was launched more than 60 years ago in the terminal market structure. Direct marketing was launched in Sioux City in 1995, adapting to an ever-changing industry and filling a void created as packers closed many country buying stations.
To be a member of Producers Livestock takes participation. There is no membership fee. Producers pay 50 cents/carcass cwt. to participate.
Pork producer members call in their hog deliveries a week ahead so Sills and four other agents can begin putting the week's puzzle together.
“We have hundreds of people, and put their pigs together with others to generate loads,” Sills explains. “Of course, we have producers with full-load lots, but the guys who got our direct marketing program off the ground are the small guys. We have marketed in excess of a million hogs (a year) for a long time, so we handle enough hogs to be important to some people.
“Every week on Wednesday afternoon or Thursday morning, we're scheduling hogs with different packers for the week,” he continues.
“I can honestly say there isn't a packer in the United States that I haven't dealt with, but our primary area is Iowa and the states that border it,” he adds.
Period of Volatility
Sills sees the current marketing environment as very volatile. “What it is today might not be what it is tomorrow. It's ongoing and I'm sure it's not over,” he says.
The industry has changed from independent to corporate pork production. Buying grids and grade-and-yield programs have evolved.
Some in the industry like to draw parallels between the 1998 market crisis and current industry strife, often noting the exception that today's industry has adequate packing capacity.
“We had adequate packing capacity in 1998-99, too,” Sills argues. “Don't ever believe that we didn't. We had things happen within geographical areas where we had too many hogs, but if you weren't putting your hogs on wheels and moving them into a void area, then you were doing something wrong.
“I never had a day that we could not move hogs,” he declares. “You could find a home — a very good home — for those hogs and make more money than you could get in that geographical circle. Packers were taking full advantage of their area's excess hog numbers.”
Sills is frustrated by two of the issues facing the pork industry today — lending institutions and the ability of the USDA to get the Hogs & Pigs count right.
“The pig crop report shows 5-8% more hogs (than last year), but the reality is we killed 11% more this week (mid-April), and we're probably not going to be far away from that all the way through 2008. At times, I wonder if the pig crop report is based on statistics rather than an actual evaluation. I absolutely believe that we have more sows out there than we have counted — ever — in the last five years.”
Sills likes to use an analogy to describe the current marketing situation: “A guy just jumped out of a plane without a parachute on, so we're trying to keep him from hitting the ground real hard!”
There are no magic answers, but there are contracting, forward pricing and hedging opportunities that can help keep producers from hitting the ground too hard, he says.
“One of the good things I learned a long time ago was you never, ever tell a producer to not take a profit. You are absolutely and totally wrong every time you do that. I don't care how smart you think you are, or if you have a whole lot of physical or historical evidence that this or that is going to happen. In our industry, we've seen advice like that go awry,” he notes.
In July 2007, Sills attended a meeting in northwest Iowa that dealt with current pig health issues and marketing strategies. An industry leader told pork producers to wait for better hedging opportunities. “It just didn't set very well with me,” Sills remembers, “so I put my own information together.”
He points to the figures in Table 1 to illustrate the spread in years when live hog prices averaged above $50 — just four times. How many times have prices averaged above $55? Once.
“So what are the odds that the average hog price for the eight-month period between August 2007 and April 2008 will be over $50?” he asks. “It's probably not very good, based on the historical averages. Therefore, if you could price hogs at $55, the odds are pretty good that it will be advantageous.”
To calculate an end price per carcass hundredweight (cwt.), Sills uses historical basis and a 74% conversion. “I'm a salesman,” he admits. “When I tell someone something, I want it to come back better. I'm not looking for a one-time transaction here. I'm looking for continued business.”
Using the conversion and Table 1 as a benchmark, Sills knew carcass prices between August 2007 and April 2008 ranged between $67.50 and $75/carcass cwt. The average live price from August to March 27, 2008 was $57.25 on the Iowa-southern Minnesota market (Figure 1).
“We put hundreds of thousands of dollars in producers' pockets using this information for a hedge/cash flow contract,” he continues.
“The cash flow contract we are using works as a hedging program, but producers don't have to pay margin money and they don't have to put in big money up front. They pay 50 cents/carcass cwt. or $200 for a Chicago Mercantile Exchange (CME) futures truckload of hogs. That breaks down to about $1/head.”
The cash flow contract is simply an extension of the hedge contract. “In the hedge contract program, you can hedge increments of 5,000 lb. (carcass). In other words, you can hedge from 25 head to infinity,” he continues. “The beauty of the program is, if you are a small producer and you feed 500-head groups, you can top off the 50 heaviest barrows. Or maybe you want to hedge 400 head and do two full contracts (80,000 lb.) You do not have to deliver 40,000 lb. at a time in this program. If you want to take 10,000 lb. off this contract (50 hogs at 200-lb. carcass weights), you can because we do an extraordinary volume of these.
“It's a very good program for all producers. You could even make eight deliveries of 50 hogs if you wanted to. The minimum cash flow contract is 5,000 lb. (25 pigs), so we're literally giving everybody an opportunity,” he points out. “You can speculate in your own account. It's a hedger's program — period.”
Sills appeals to lenders to stick with producers during this rough time. “If you have clients who have weathered '94, '98 and 2002, they've weathered some heavy duty storms,” he argues, “I'd like to believe that a lender would especially stick with an independent producer who raises his own corn, because he is in absolutely the best position of anyone in the pork industry today.”
The recipe for survival falls on everyone, Sills continues. He admonishes pork producers to cull more sows. “When the money is flowing and pork production is in a fat, dumb and happy mode, producers just put that sow back in the crate and keep going. When you are paying $6 for corn, that sow had better be an excellent producer. If she's not, you really can't afford to keep her. In reality, a deep culling appeals to me a great deal more than mass liquidation,” he adds.
“No doubt, we have too many hogs. As an industry, we have done that to ourselves. We will not survive this industry if we don't sell this thing down and get it into a manageable position,” he warns. “To get them culled down and processed is not going to be easy. As people cull sows and send them to slaughter, and they pull hogs ahead to sell them at lighter weights, this could be a bumpy road.
“I would talk to any lender at any time. I would plead with them to keep these guys out here. This thing will, in fact, turn around. Will it be fun and easy? No, it will not be,” he assures.
“But if we sell mass quantities of hog producers down the river, we will end up with a supply short of the current slaughter capacity, and then we'll have to wonder which pork processor will close a plant.
“Understanding that things could change, along about the July-August timeframe, I think we'll see a light there at the end of the tunnel. At least by the end of the year, I think the light will be brighter,” he predicts.