There has been an amazing run with pork prices, tipping over $100 cutout again last week. I have a chart (Figure 1 attached) that shows a historical view on cutout. As you can see, 2011 is a year for the record books. Even with higher feed costs, cash prices above $90 and a consistently strong cutout have made it a very good year for pork producers.
This situation has been fueled by export demand, which is on fire, and continues to keep prices high, even with slaughter numbers at pretty large numbers — over 2.3 million/week. The common question from producers is: How long will it last? With exports, you never know. Even though we are exporting pork at a record pace, we all know it could change quickly.
There is a fair amount of pork going to China. But remember 2008, when we were shipping a lot of pork to China and then it seemingly stopped overnight. Cash prices went from over $90, carcass, to the mid-$60’s in less than a 30-day period. I am not saying cash prices are going to drop, but in meeting with clients I emphasize how important it is to maintain a disciplined approach to margin management. We are seeing profits of between $20-$25/head for the next 12 months. It might be a good strategy to take part of that profit now. Don’t forget, on Labor Day, the same 12-month margin was less than $5/head. Market volatility will continue.
Financial Snapshot of the U.S. Pork Industry – I have given a couple of presentations recently about the financial strength of the U.S. pork industry. At AgStar, we are very fortunate to work with producers of all sizes who have given us a very good handle on their financial results through July 2011. Currently, in terms of owner equity, we are 45% GAAP (Generally Accepted Accounting Principles) equity. GAAP equity is a conservative view of owner equity.
Here’s an example: if you own 10,000 head of finishing spaces that are 6-7 years old, you might be able to sell them at $160-$180/pig space. Through depreciation on your balance sheet, however, you have them valued at $120/pig space, which is lower than the actual market value. Therefore, in essence, you might have a higher market value owner equity percentage. In 2009, we were at 25-30% owner equity. In 2007, we were at 60-65% owner equity. We have made back a little bit more than half of the equity that producers lost in 2008-2009. In addition, the current ratio average, which is current assets over current liabilities, is greater than 1.9 to 1. That number does not include sows as a current asset. Back in 2009, we were slightly over a 1-to-1 current ratio, which means producers are in better shape today in terms of liquidity.
In looking at the profit per head, year-to-date, we are close to $15, ranging from $5/head to over $30/head. There is still quite a variation in profit-per-head across the sector. The difference is margin management and overall performance between operations. Pigs/sow/year, mortality rates, feed conversion and other factors all make a difference in total cost of production. There is an elite group of producers who have owner equity back to the levels of where they were in 2007 — and it is not a function of size. They have managed the downturn very well with sound risk management and tremendous production. Some of these producers will look at expanding next year due to the financial strength they currently have. I would like to say they won’t, but if the current price levels hold into 2012, there will be expansion in the swine industry, you can count on it.
Click to view graph.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com