The selloff in grains has pushed projected breakeven costs for average farrow-to-finish operations back below the $90 mark for the second half of 2011 and first half of 2012 (Figure 1). The average for 2011 is now forecast at $84.69/cwt., carcass. That compares to $69.22/cwt., carcass, last year and $52.76/cwt., carcass, from 1999 through 2006. This year’s cost level is 22.3% and 60.5% higher than those two historical measures, respectively.

The only problem with that selloff, of course, is that it hit Chicago Mercantile Exchange (CME) Lean Hogs (LH) contracts as well. May, June and July LH futures have all declined by over $10/cwt., carcass, since early April, while August has fallen by over $8/cwt., carcass. The decline for fall hog contracts is a bit smaller, but still very significant.

The net impact has been to dim the profit prospects for this year and next pretty dramatically. In late February, CME Group lean hogs, corn and soybean meal futures prices combined with the production parameters used by Iowa State University in their costs and returns forecasts implied 2011 profits of just under $10/head. As of Friday, that number stands at $1.90/head. For the next 12 months (May ’11 through June ’12), that figure is -$1.86/head.

These numbers provide very little incentive for changing hog and pork output. The profits are certainly not enough to encourage expansion using either equity or debt. They are also probably not large enough to force many producers out of business, given some recovery over the past 12 months. I expect the sow herd will remain pretty stable with slightly higher slaughter numbers and production very close to last year’s level. Weights will remain historically high but will likely get closer and closer to last year’s inflated levels as we approach fall. Will grain quality and slack space continue to allow barrow and gilt carcasses to average 205 lb. and more?

20,000 Sows or More Back in Production
In spite of these numbers, it appears that some expansion is definitely coming in the Texas panhandle. Cargill has purchased the former Bass Brothers/Premium Standard Farms/Smithfield site near Dalhart, TX. The company plans to transfer weaned pigs to grow-finish facilities in the Midwest. Cargill says animals produced at the site will be harvested in 2012.

My industry contacts say the farm held about 20,000 sows when Smithfield closed it in 2010. The site includes nurseries and finishing facilities for a portion of the pigs from those sows. Those postweaning facilities can be converted to breeding-gestation and farrowing. It is speculated that the farm could house roughly 30,000 sows if fully converted.

I have no information regarding Cargill’s production efficiency, but I assume they are very good at what they do. We know that a freshly cleaned facility filled with gilts of a known-disease status can be very, very productive. With that in mind, I would expect the 20,000 sows to produce 530,000 to 580,000 pigs, which would add a bit more than 0.5% to total annual slaughter in the first year of harvesting (likely Q4-2012 through Q3-2013).

I know of a few empty sow barns that were filled this past winter and early spring, so some higher level of output is on the way. Will it be offset by producers who look at $7 corn and say, “To heck with it!”?

Wit and Wisdom from Buffet and Munger
Once again, I had the pleasure of attending the Berkshire-Hathaway’s annual meeting in Omaha on April 30. As usual, it was a pleasure to listen to Warren Buffet and Charlie Munger discuss their various businesses and their views on business matters, the economy, etc.

But this year’s meeting was dominated by the March departure of David Sokol, a Berkshire board member and one of a handful of executives who most believed were in line to succeed Warren Buffet at the helm of Berkshire. You may recall that Sokol resigned after revealing that he had recommended that Buffet buy Lubrizol shortly after he (Sokol) had bought a large block of stock. Questions posed to Buffet asked, “Why weren’t you angrier at Sokol?” and, “If you are so high on ethics, why did you praise this guy’s past work after he had so seriously breached Berkshire’s long-held ethical standards?”

I was impressed with Buffet’s reply, but even more impressed with the emotion it embodied. While he may have been angry at Sokol, it certainly appeared that the dominant emotion was simply sadness that the mistake had been made, that it had been made by a trusted lieutenant, that his friend was no longer his employee. “Inexplicable and inexcusable,” said Buffet.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com