Just a month ago, I wrote about producers were finally having a nice six-month run of profits. The USDA’s Hogs and Pigs report came in at about what the trade expected, so things were looking positive for the pork industry going in to 2011. On Friday Oct. 8, when USDA reported that the U.S. corn crop would only average 155.8 bu./acre, the world changed for any pork producer reliant on buying the corn they needed. Since then, the price of corn has shot up over $1/bu. and other feed ingredients have followed. Producers’ breakevens that were $135-140/market hog are now at $145-150/market hog (over $75/carcass cwt.). This happened in a short span of about 72 hours of trading. The cash market has dropped over $20/head since I wrote last month’s column, adding more agony. Unfortunately, some producers will lose money in October. U.S. pork producers are far from being in a position to handle a period of losses again.
There Were Opportunities to Lock Up Margins – I don’t remember how many times I have written articles stressing margin management, but I’ll say it again – “It is critical for every pork producer to manage their margins.” Figure 1 illustrates some of the opportunities that were available over the last six months to lock up profits for a considerable period of time. The chart shows the average profit-per-head potential from the end of March until last week. You can see there were opportunities to lock up over $20/head profit for a year. This is based on locking up the price for your hogs and your feed – the crush margin. Of course, these are averages and there are many factors that play into the data in this chart, but the point is there were opportunities for pork producers to lock up good profits for a period of time. The chart was provided by Pat Von Tersch, Professional Ag Marketing, and I appreciate him putting the chart together.
Packer Margins – Spread Between Cutout and Cash – The spread between cash hogs and pork cutout has been wide for quite some time. David Ward from Commodity & Ingredient Hedging, LLC put Figure 2 together. We are at historical highs and it has been this way for quite some time. My concern is that the spread is too wide. Over the last month or two, the difference between cash and cutout has been below 85%; at times it has been below 80%. If this spread continues and cutout drops much further, it will create losses for many producers who can ill afford them, while packers are enjoying record processing margins. If this spread continues, more pork companies will look at integration or owning a packing plant. When one side gets too much of the pie, others want to take a piece of that pie. This is part of business and must be understood.
GIPSA Comments need to be in by Nov. 22 - I urge everyone involved in the pork industry to go the National Pork Producers Council (NPPC) Web site, www.nppc.org/, to read the rule that the USDA’s Grain Inspection and Packers and Stockyards Administration (GIPSA) has proposed. The 2008 Farm Bill authorized GIPSA to promulgate regulations related to livestock and poultry contracts. It’s important to fully understand what is being proposed and to file your opinion by Nov. 22. From a lender's viewpoint, there are many concerns on what could potentially happen if this rule is implemented. I believe the proposed rule will speed up integration. I also understand and support that all pork producers should be treated fairly. My concern is that when it comes to access to capital, the limitations placed on risk management plans formed between producers (of all sizes) and packers could be taken away. This will make it more difficult for producers to get the capital they need. The pork industry lost almost $6 billion in equity from 2008 to early 2010. Clearly, risk management tools are essential to getting access to capital. This ramification needs to be fully understood before implementation of this rule. It is imperative that everyone in the pork industry file their thoughts on the GIPSA rule before Nov. 22.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com