The impact of the bad economic picture plaguing the hog industry for the last two years showed up in the USDA’s latest Hogs and Pigs report. Total sow numbers compared to a year ago were well below what the market was expecting. This is good news for many producers who were able to survive the extended market downturn and it looks like the economics for 2010 will be good. How good? It’s really too early to tell, but if you look at current cost of production and hog future prices, many producers have a chance to make $10-$15/head this year. This will certainly help heal the balance sheets of some producers.
Locking in a Profit Always Makes Sense – Many producers locked in some futures prices before the USDA report was issued and now wonder if they made the right decision. My response to them is this, “You locked in a profitable price and you will still have an opportunity to improve some margins on your open market hogs. And, having a better hog market should also improve your basis position concerning cash hogs.” The bottom line is this: you never go broke locking in a profit. Remember, when the market is going up, it is helping or improving your overall margin. You need to stick to your plan going forward because things can change quickly. The March Pig Crop report may also have given us better margin opportunities for the fourth quarter 2010 and the first quarter 2011 than earlier anticipated.
Cash and Cutout Needs to Lead the Way – Even as the Hogs & Pigs report shows fewer pig numbers, the next important steps are cutout values and cash hog prices need to rally. I have seen cutout values decline over the last week and, even though we have less supply coming, the bottom line is what we can sell our product for while keeping demand strong. For example, if July futures are at $81, we need cutout values to approach $90. That has only happened once – in 2008, when China came into the market. So, if cash hogs get to $80 or higher, keep an eye on how strong pork demand is at those levels. The U.S. pork industry is still the most cost-competitive place to raise pork in the world.
Don’t Even Think about Expansion - I don’t want to rain on everyone’s parade just when things are looking a little brighter, but it is important to understand that the strength in the market is a response to reduced supply. My concern is that some producers will think we can go back to higher production levels without consequences. Breakeven prices are around $130-$135/head today, but that could change, particularly if we have any weather concerns throughout the upcoming growing season. For now, enjoy making some money and focus on getting your balance sheets in better shape. Enjoy the good times, but remember the bad times.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com