It’s been a long time coming, but the majority of the pork producing units is making money.
The trend started in March and continues into April. Most producers are receiving cash prices over $160/head. With breakevens around $135/head, most producers will average close to $20 profit from an operational standpoint. That is welcome relief for everyone involved in this industry.
In talking to producers, they seem to fall into two camps – one wondering when the other shoe will drop, the other thinking happy days are here again. It’s important to remember that a year ago the industry was being hit with the fallout of H1N1 influenza virus, which had a crippling effect on hog prices for a good part of 2009. Barring any major trade issue or something that would affect demand – export or domestic – I think the pork supply is in good shape with where demand is today.
Price Reporting – As I continue to look at hog prices every day, the trend indicates we are short on supply. If you look at the negotiated price for pigs on the daily afternoon report, www.ams.usda.gov/mnreports/lm_hg203.txt, you will see the weighted average on a carcass basis is $80.61. This price does not include grade and yield and or sort loss. If you scroll to the bottom of the page, the live bid is $65.24. The bid is on a live basis only (no grade and yield premiums), but there is no sort loss either. If you bring this price back to carcass it equals $86.99 ($65.24 @75% yield). The difference is rather large – nearly $5-6/head. The packers bidding for these hogs are playing within the rules of pricing pigs, but as you know, almost all are marketing agreements that have a base price based off of a carcass price. Since the beginning of this year, the live bid has been higher because of the shortage of pigs. This trend will continue when the market is short of pigs, but it is a trend worth watching.
Margin Calls in a Rising Hog Market – Last month, I noted that some production systems locked in prices at lower levels than they are currently. On the Friday of the USDA’s Hogs & Pigs report (March 26), I took some time off to babysit my 20-month old granddaughter. As the USDA report came out that afternoon, she was taking a nap, so I was on the computer. When I saw the report, I thought: “There are going to be some serious margin calls coming.” I emailed our staff at AgStar Financial Services to alert them that we will be funding a significant amount of margin money and, therefore, will need to assess increasing some hedge lines on certain systems. Soon, I started getting phone calls from producers asking: “What do we do if hogs go over $90?” Similar calls are still coming in. I stress to these producers that they locked in profits and they still have some hogs that are left open, and these are helping the overall margin for your business. I remind them that it is very difficult to pick a top in the market and that they will never be right on a direction in the market all of the time. I also remind them: “You locked-in profits; you never go broke locking up profits and margin calls, at the end of the day, are actually a good thing.”
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com