Pilgrim’s Pride’s Monday filing for protection from creditors under Chapter 11 of the bankruptcy code came as no real surprise. The company had lost huge sums of money each of the past two years as it struggled beneath the load of debt it took on when it bought Goldkist in 2006. Add in high-priced feed and breast meat prices near their lowest ever and the situation finally became untenable. Pilgrim’s stock had reached penny status several weeks ago, and two extensions of debt on facilities did not provide enough time for the company to make any substantial progress.
This in no way means Pilgrim’s will disappear or that its chickens, which represent 24% of the U.S. market, will disappear. The company will sell some assets, close some operations, downsize others, etc. as it devises a plan to continue in a smaller, leaner form. Its equity holders have lost virtually all of their investment, and now the creditors will line up to list what is owed, and get a place at the table for new financing arrangements. But the company will go on.
The cutbacks, however, will be important. It is not clear how much of the recent reductions in egg sets and chick placements have occurred at Pilgrim’s operations. Industry sources tell me they comprised a good portion of the reductions but not near all of them. Other chicken companies have reduced sets and placements, too, and those cuts are beginning to show up in higher chicken prices (see Figure 1). The problem remains leg quarters, which were down 19% last week, and are still over 40% lower than one year ago. These price reductions are caused primarily by a slowdown in exports.
Chicken Downturn Will Boost Pork Prices
Any reduction in chicken output will be supportive of pork and hog prices – but you couldn’t have guessed it by looking at Lean Hogs futures the past two days. As of Tuesday, I was ready to declare that a major reversal had occurred in Lean Hogs futures, since prices moved above the 50-day average late last week and then the 10-day average crossed the 50-day average. See the April Lean Hogs chart in Figure 2. The charts for the rest of 2009 looked much like the April chart.
The sell-off of Wednesday and Thursday has to call this “reversal” into serious question, though, and futures prices dropped back below what I expect in cash markets next year. I still do not think it is time to sell hogs for next year as November and December are hardly ever advisable times for forward pricing. But I would feel better about that if the market would indicate that it is indeed turning.
Plotting Profits in 2009
USDA’s December hog inventory survey went out on Monday amidst much more encouraging futures price relationships for U.S. hog producers. My computations using Tuesday’s future prices showed that producers with production parameters similar to those used by Iowa State University in its Estimated Costs and Returns series could have locked in profits averaging $13/head for 2009, assuming historical Iowa basis relationships held for hogs, corn and soybean meal. That figure has fallen a bit since Tuesday, due to the drop in Lean Hogs futures, but concurrent reductions in both corn and soybean meal have offset part of the hog revenue decline.
Regardless of the precise number, the fact that it is positive and reasonably large suggests the incentives to reduce sow numbers may be gone. And weekly sow slaughter (Figure 3) reflects that conclusion. The slaughter of U.S. sows had run far above year-ago levels for much of this year. In fact, slaughter of U.S. sows had been below year-earlier levels for only three weeks in 2008 prior to Oct. 25. Three of the past four weeks have seen a year-over-year shortfall of the slaughter of U.S. sows.
Slaughter of Canadian sows in U.S. plants had been lower than one year ago for all of the summer months, due primarily to Canada’s sow buyout program. The number of Canadian sows in U.S. plants has moved closer to year-ago levels since the program has ended.
It is unlikely that the U.S. herd can go from -2.6%, year-over-year, on Sept. 1 to anything positive by Dec. 1. But a number closer to zero is clearly a possibility, especially given the profit prospects for next year.
The Canadian herd is another question. Going from -8.6%, year-over-year, on Oct. 1 to any number near zero, will take awhile. While economic conditions have improved north of the border (see the hog price percentage changes in the data table!), there has still been some substantial sow liquidation this fall as Canadian producers deal with the uncertainty of the mandatory country-of-origin labeling’s impact on their customers and their operations.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.