Anyone looking at their 401K accounts during the last couple of weeks has gotten a better idea of what it is like for pork producers trying to manage their risk. As the stock market takes wild swings seemingly every day, the value of 401K accounts have seen some pretty significant drops in value. Although the market has come back some, today’s (Aug. 18) market was down over 400 points. Some of our swine clients have said, “Welcome to my world!” The amount of volatility in all markets is unprecedented. The main reason for the volatility is there is so much uncertainty about the direction the economy is headed. With no real clear path, market volatility seems to be the norm. This past week, as I looked at hog crush margins for the next 12 months, we have lost over $7/head. The main reason for this is the drop in hog futures. As Figure 1 (attached) shows, there is a seasonal tendency for margins to drop after the first week in August.
Feed Supply Tightens
The most recent crop, released last week, predicts a national yield at 153 bu./acre with a projected carryout of 775 million bushels for 2011-12. As Iowa State University Extension Agricultural Economist Bob Wisner points out in Figure 2, we are very tight on our feed supply. There is a fair amount of wheat being fed in the eastern Corn Belt and, for now, that trend will continue. Most producers are currently using multiple feed ingredients to offset a portion of their standard corn/soy diets. Nutritionists are being challenged to balance diets without sacrificing performance and carcass quality. Producers that can do this successfully gain an advantage. At current prices, a 0.05 difference in feed conversion is worth over $1.70/head. With costs so high, every little bit makes a difference.
Pig Spaces Tight
In the past month, we have seen pig spaces get tight in the Midwest. In fact, I have seen some e-mails floating around from producers saying they will take open-front barns and/or hoop barns. Several people have asked me if we have a “wall of pigs” coming this fall. There are a couple of items to remember:
• This summer has been very hot and pigs just have not gained like they should. This is contributing to the pig space shortage.
• There has also been a move to less nursery-to-finish spaces in favor of wean-to-finish systems. This takes more pig space, as well.
Productivity in the sow herd has been excellent. And, I believe we will process more hogs in the fourth quarter of 2011 than we did in the same period last year. But I would also stress that I think weights will be lower than a year ago, so our net supply will be close to the same as a year ago. Figure 3 shows carcass weights well below a year ago, confirming the impact of summer heat. In addition, as you look at fourth quarter weights in 2010, I think it will be very difficult to get back to those weights. This is worth watching. When you look at pork supply, you need to look at total pounds of pork produced.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com