In the past two weeks, I have seen numerous articles concerning higher food costs. The rise in commodity prices has made the news and now the talk is that consumers are going to have to pay more for food in the future. The average U. S. consumer spends 10% of their disposable income on food. This statistic reinforces what has been truly an amazing story: Blessed with tremendous resources, the American farmers have the ability to produce an abundance of food, not only for the United States, but for others throughout the world.
Higher feed costs have made it more challenging for the protein sector to be profitable. In 2010, the average cost of most producers to produce a 270-lb. market hogs was $140-$145. Going forward, with current feed costs, that same animal will cost an additional $25 to produce. This, alone, will cost the U.S. swine industry an additional $2.7- 2.8 billion. If these costs do not get passed onto consumers, there will be less pork, and that, too, will push prices even higher. This is true not only for pork, but for milk, beef, eggs, and broilers. In order to recoup the additional costs, prices will have to increase 10-15%. Will consumers be willing to buy the same amount of product at higher levels? Time will tell.
Volatility Requires Better Business Planning – I had the privilege this past week of speaking at the Banff Swine Conference in Banff, Alberta. The focus of my talk was on financing agriculture in the future. I stressed that there are tremendous challenges and opportunities for anyone involved in agriculture. With each passing year, there are almost 70 million more people on this earth to feed. Many experts claim that we need to double, maybe triple, food production over the next 40-50 years.
I believe future population growth will continue to perpetuate tremendous volatility in all commodities. When variability is high and predictable revenue streams are unpredictable, the challenge to lenders is great. Lenders will require much more live budgeting and financial forecasting than ever before. Margin management and/or risk management of your business is essential. Is your company trying to stabilize revenue and present business plans with a higher degree of predictability? Some will ask: “Does he ever say anything different?”The simple answer is “no.” Successful pork producers have developed these strategies and are much better prepared to manage volatility in the marketplace. I can’t tell you how impressed I have been by producers of all sizes who have been profitable and successful with this strategy.
2011 Outlook – In looking at the next 12 month’s futures, the average price is close to $90/cwt., carcass. This equates to $184.50 on a 205-lb. carcass. There still is $10-$15 of profit per head for most producers. The basis on hogs has widened since September (Figure 1), which will narrow the margin for producers. Processors are still making very good margins (Figure 2), but producers need a little larger portion of the margins in order to be successful next year. Volatility is the norm for the foreseeable future. You will need to get better at all aspects of your business to be successful.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com