It is almost unbelievable to think that at the beginning of June, corn prices were $4.00/bu. Now, prices in southern Minnesota have nearly doubled and new crop corn was priced at over $7.60/bu. on Friday, July 20. Soybean meal costs have gone from $380/ton in June to trading at $540/ton. It is our best estimate that feed cost per head for a farrow-to-finish producer is between $125-$130, putting breakeven costs at $180 to $190/head. This equates to a breakeven of $0.70/lb., live, on a 270-lb. market hog. Year-to-date, some producers’ breakevens are averaging below $0.62/lb., but that’s a $25 to $30/head increase in cost of production.
In the U.S. pork industry, on an annual basis, the cost increase alone is close to $3 billion. This all happened in just 60 days and serves as a reminder of the constant volatility pork producers must manage. To an independent producer raising 10,000 head a year, costs have increased $250,000 annually.
Here are the four things I have told clients:
- Working capital or liquidity is very important. It will help you manage through volatility. Leveraged producers will have a tough time surviving the volatility.
- Manage your margins. Producers who managed their margins in 2008-2009 survived and recovered very well.
- Possession of feed will be important next year. Do you have a plan to ensure you can meet your feed needs?
- Be creative with what you feed. Work with your feed supplier/nutritionist to possibly expand feed ingredient alternatives.
Feed Rationing – Many have asked if there is a way to ration feed supplies and address the projected shortfall. It would be great if we could get all of the industries to work together to help address this potential problem but, unfortunately, it is not likely to happen. Think about what you will need to do to ensure you have adequate feed supplies. It is a harsh reality that all users of corn will need to face. This year is beginning to remind me of 2008, when we were worried about not having enough feed. We tell our clients every day that it is our job to help them survive volatility.
Adapting to Change – Most who are regular readers of this column know that I am a runner. I have had some issues with my Achilles tendons in both feet and have struggled to get back to my running form this year. Whenever I try to run, for the next couple of days I have a difficult time even walking. On Memorial Day, I went for a run, but the next day I could barely go down the stairs. My son, also an avid runner and a personal trainer, said to me, “Dad, you need to take a break and start cross training or you might never run again!” Reluctantly, I took his advice and began cross training to stay in shape in hopes that one day I will be able to run again.
I share this story with producers who long for the day when corn was below $3.00/bu., and a big day on the Board of Trade was a nickel move on corn, a dime on soybeans and, maybe, 30-40 cents on hogs. We are in volatile times and it seems that every day is significant to managing risk in your business. The producerswho can manage through all of the changes that are occurring will also have some great opportunities ahead. The future is not easy or predictable. The bottom line is this – you must continue to focus on margin and you must continue to adapt to the changing marketplace.