We have had an amazing run in swine prices in December and January. Cash prices are running close to $70/cwt. carcass, an unusual occurrence for this time of year. While attending the Minnesota Pork Congress this past week, I noticed many producers had smiles on their faces for the first time in almost two years. In talking with many producers, I found mixed emotions. Some feel that they might actually have a month where they have a chance at being profitable. The other thought is a concern about what could cause the market to turn down. The consensus that I heard was that they still have not gone a month in almost two years where they actually made money, “so let’s not get too excited. We have a long ways to go to get back to where we were in 2007." This is a nice start and a welcome change.
Cut out – Attached you will find a historical chart on pork carcass cutout. Notice that as of Jan. 21, we are at the highest value that we have been in the last nine years for this time period. The last time we had this kind of run was in 2005. There are two drivers here – demand has been very good across the board for all cuts of pork and hog supply numbers are running below a year ago. Higher demand coupled with reduced supply generally results in higher prices.
Click to view graphs.
Positive Margins for 2010 – If you look at current Chicago Board of Trade, prices for lean hogs average above $73/cwt. carcass. The breakeven levels in most pork production systems is about $67/cwt. carcass, on average. There are other items to consider, but it looks like there are profits of about $10-$15/head.
Many producers ask what they should do – lock up some positive margins or play the odds on the open market since we are on the upswing. First, I remind them, this is their business and their decision. I understand that producers have lost a lot of money and they want to capture as much profit as possible when the market improves. Still, we have seen more volatility in the markets over the last two years. If volatility is going to be the norm, working on margin management might be more important than ever. Locking up some profits on a portion of your production can also help you sleep better at night, as well as allow you to focus on other items that can positively affect your business. You can also use options, which can allow you to capture more upside if you are positive on the market. These decisions are never easy, but you’ll never go broke locking in a profit.
Be a Student of Your Business – The past two years we have seen some producers do a better job of managing through these tough economic times than others. The successful producers are constantly working and learning about what is happening in the marketplace. You need to be aware of good and bad things that are happening. For example, do you look at the pork cutout report (www.ams.usda.gov/) every day? You should. It gives you a trend reference on the meat side – whether it is good or bad. The “Pork Carcass Composite” chart referenced above also provides a seasonal tendency over the past nine years, including cutout trends.
We recently held a webinar featuring Brett Stuart from Global Agritrends, who gave an update on exports of all proteins and he addressed the ban of poultry imports by Russia. We all know that exports are very important to the success of the pork sector. The graph below shows what happened to pork prices when poultry was banned in 2002. To date, this poultry export matter has not been resolved with Russia, but it reinforces the importance of being a student of your business, being aware of factors that can affect the economics of your marketplace. Let’s hope the positive market continues. It has been a pleasure to once again write a column that talks of profits for a change.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com