This is the question I was asked over the weekend by a person that is not familiar with our industry. I was running next to him on a treadmill, trying to pound out some miles and longing for the days of being able to run outside after a long Minnesota winter. I looked at him and said, “No, actually, the last 2-3 months the average producer probably lost some money and, maybe, at best broke even.”
He responded, “All I know is when I go to the meat case, pork prices sure are up compared to what they used to be.” Well, I have a hard time running and talking at the same time, but I saw this as an educational moment, so I proceeded to fill in the blanks for him.
I explained the cost to feed a pig to market weight is close to $105-110/head, depending where a producer is located. That’s roughly the same as it was four years ago. The point that I stressed to him is the global market has changed. We have a growing population – 70 million people more per year on the planet – and many more people in developing countries who have more money than ever before to spend on food. I also noted that there is a very tight supply of grains (corn, wheat, soybeans) around the world, which causes food inflation. All food costs will have to go up to keep suppliers in business. If suppliers go out of business, there will be less supply, which will drive prices even higher.
He said he had no idea and that he now understood how this situation could cause concerns about how even U.S. consumers will react. How will they decide where to spend their limited dollars, not only on food, but on other items, such as clothing?
I gave him something else to consider. My son has a friend who is a buyer at a major department store. Part of his job is to negotiate pricing. He told my son that the prices of jeans are going way up because cotton prices have skyrocketed. When I tried to explain the supply-demand situation to my son’s friend, he just shook his head and finally stopped talking to me because he did not like what I was telling him.
These encounters made me realize that the consequences that are occurring in our industry truly do have far reaching effects on many people. It is worrisome. How will the higher grain, higher meat and higher milk prices, which will inevitably occur, ultimately affect families that have limited disposable income? These are harsh realities for many people that are not involved in agriculture. I believe all of us in the industry need to try to educate people about our industry whenever the opportunity arises.
Pork Export Webinar – The situation in South Korea with foot and mouth disease has been very supportive to U.S. pork exports. Exports have been the key to higher hog prices and the question is how much more pork can we keep exporting? At AgStar, we are hosting a webinar on Wednesday, March 2nd at 1:00 p.m. (CST), featuring Brett Stuart from Global Agritrends. Brett does a very good job of looking at exports for the protein sector and I appreciate his insight. If you have an interest, sign up for this webinar at this link: www1.gotomeeting.com/register/303688865. Space is limited.
Margin Management is Not Easy – I have received numerous phone calls from pork producers who locked up summer hogs well before the run up to the current level of over $100/cwt., carcass, for some of the summer months. Producers have had to fund a lot of margin calls and it has been painful for them to watch their margin account go up and up.
Sometimes I feel as though I am more of a psychologist than a lender to the pork industry. I stress to these producers that nearly all of them locked their corn up in the mid-$4.00 range and had a positive margin, similar to what is currently posting.
It’s easy to think – if I had done nothing on the hogs and had my corn locked up, look how much money I could have made! It is always easy to second guess any decision; hindsight is always 20-20. The key point that I stress to all producers is that with all the volatility in the marketplace, you must now work more than ever to be disciplined to a margin approach where you lock up your feed and your hogs together. There is a significant amount of volatility that can change things literally at a moment’s notice. The best advice is – stay the course and be disciplined in your margin approach.
Mark Greenwood, AgStar Financial Services; mgreenw@agstar.com