At the risk of sounding like a broken record – the U.S. pork industry has sustained two years of losses totaling over $5 billion. Current economics show costs very close to $130 to $135/market hog, with revenue lingering around $100-$105/head. It seems that we have been averaging over $25/head losses forever. The industry continues to downsize, but we still have plenty of supply in the pork chain that we need to work through to get to a level of profitability. Most producers do not have a lot of liquidity left to help manage through sustained losses. The industry must get to a profitable level soon.
Who is liquidating and why aren’t sow slaughter numbers higher? I get this question everyday from producers and others who are watching our industry. Liquidation is occurring. Producers are downsizing or getting out of the business, but as I’ve said many times, this will be a slow process. We will need to average 60,000 to 70,000 sows per week for an extended period of time – probably through March of 2010 – to get sow numbers down to a level where pork supply is in line with demand. The issue for many producers is to maximize value for their business even if they are liquidating. Producers will not sell all of their sows in a short period of time. If sows are confirmed pregnant or close to farrowing, they will want to capture the value of the weaned pigs. The decision to liquidate, whether by the producer or the lender, is never quick or easy.
Parity in the sow herd and gilt retention – This is something that the industry does not have a good handle on. Genetic companies report that gilt sales are very slow. Other reports indicate that sow parity averages are increasing. Instead of taking the time to isolate and acclimate gilts for the breeding herd, they are selling gilts as market animals, then breeding aging sows one more time. This will eventually show up in the marketplace. We have seen sow productivity continue to improve, but if we are increasing the average age of the sow herd, productivity will eventually decrease. This is something to watch as we go into 2010. Maybe the mold/mycotoxin issues in the corn crop and an aging sow herd will reduce supply further.
What level of supply will return the industry to profitability? It my best guess that we will see market hog slaughter numbers get down to 109-110 million head in 2010, which is a reduction of at least 3%. The pork industry needs to average over $70/cwt., carcass, to be profitable, with current breakevens at $66-68/cwt., carcass. Will this reduction in supply get us to that level? We don’t know, but we certainly hope so. Demand overall has been good and exports have actually been better than anticipated. We have summer 2010 hog prices pegged at a level where most producers can make over $10/head. The question is what could happen between now and then? There are many factors that can affect prices, of course. We saw what the novel H1N1 influenza virus did to the market earlier this year. As I noted earlier, many producers do not have the liquidity to do a significant amount of risk management and they are hoping that the cash market will be better next year.
Thanks – I have had many people ask me how I am doing during these difficult times and I wish to thank them for their concern. This is great industry with a lot of good people, so it is especially hard to see so many good people struggling. We are at a time of year when many of us reflect and give thanks. It is my privilege to work with many good people, including an office staff that has worked countless hours on trying to help people during these difficult times. All of us hope that 2010 is a much better year – and the sooner the better. I’ll close, then, wishing you all a belated Happy Thanksgiving.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com