JIM LONG'S PORK COMMENTARY

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October 23, 2006

By Jim Long, Senior Vice-President, Genesus Genetics

Higher Corn and Feed Costs are Decreasing Hog Profitability

The Iowa-Minnesota lean hog price averaged 60.60 last Friday, down from 64.22 the week before.  The pork cut-out was 65.63 Thursday down from 69.56 seven days previously.  When pork cut-outs drop, packers try to pay less.  Certainly they have lots of hogs to slaughter with US week marketing of 2.213 million last week, up 1% from last year’s same week’s 2.191.  Indeed, more hogs but in line with market expectations.  The latest slaughter weights indicate hogs slightly lower than a year ago, a reflection of current inventory.

Corn Prices

We might as well pile on the feed and corn price issue, as just about everybody else has.  Corn has moved higher, depending on your location between 75 cents to $1.00 a bushel in the last couple of months.  The impact on hog production profitability is pretty obvious.  It takes about 10 bushels of corn to produce a hog to market (including sow feed) in a farrow to finish system.  If we use the upside price of $1.00 a bushel that is an increased cost to produce a hog of $10.00.  If you are truly integrated in the old way by growing your own corn, it is relatively cash flow neutral.  If you are buying corn, it’s a huge appreciation in cost.  We estimate over 75% of the industry’s production buys it’s corn or feed and consequently has a greater level of exposure to this price movement compared to 20 years ago when integrated farrow to finish operations grew their own corn.  In our opinion, most farrow to finish operations will currently have an all cost in (including depreciation) breakeven of 58-60 cents per lb lean (45 cents live lb).  Not far off where hog prices are currently.  Right now, in our opinion, the bulk of our industry is trading dollars with little profit.

Ramifications

• Higher corn and feed prices will limit expansion.  With the reality of new building costs pushing breakevens, it is our opinion, a new farrow to finish system would have breakevens near 70 cents lean (50 cents live weight lb).  It would take a lot of courage to go ahead when the hog prices needed to break even are near historic annual highs.  Heaven forbid, but $5.00 corn like we saw in 1996 would add another $20.00 per head to overall costs.  Chances are slim that this could happen, but who the heck really knows?
• Sow units producing early weans have had their breakeven increase $1.50 per head in the last few months, due to increased feed costs.  On top of this, higher energy costs, labour, and environmental regulations are continually increasing cost.  Margins are getting squeezed.
• So far feeder pig and early wean prices have stayed relatively strong with U.S. feeder pigs averaging 47.20 early weans 35.06 last week.  Part of the reason is the relative tight supply of pigs and cash availability of finishers that have made good money over the last two years.  If past history is correct, the higher feed prices will eventually take the price of early weans and feeder pigs to levels that will ensure breakevens for the finishers at these higher feed costs.  If nothing else, the higher feed costs are going to limit the insatiable demand for early weans and feeder pigs, we have experienced.  The feeder pig and early weans producers’ greatest nightmare would be $5.00 corn with 60 cents lean futures.  Spot cash market early weans would be $10 to $15, feeder pigs $20 to $30.  We have seen it in the past.  The comfort of good long-term early wean contracts certainly are attractive in such a circumstance.
• Ethanol is the wild card.  From what we have read, it is a political winner.  Probably economically foolish, but it is happening anyway.  Certainly there is no upside for the livestock and poultry industry.  This in October 9 Feedstuffs, ‘In its October issue, Consumer Reports gave E85 ethanol a less than raving review.’  The magazine’s study, which included road tests of a vehicle that runs on either gasoline or E85, concluded that although it ‘emits less smog producing pollutants than gasoline’ E85 ‘provides fewer miles per gallon, costs more and is hard to find outside the Midwest.’  Because of these factors, government support for E85 compatible vehicles ‘is indirectly causing more gasoline consumption rather than less’ the magazine said.  Throw on top of this calculation the increasing cost of production of added value products such as meat and poultry that make them all less competitive and profitable in world markets.  What is the sum game equation of the ethanol push?  A big minus!

Conclusion:

Higher corn prices will slow, if not stop swine expansion.  This industry as we know it, is quite sensitive to what can happen in the marketplace.  After all, most of the people in the industry have lived through low markets and high feed prices.  We expect higher corn prices will buy several millions acres of more into production in 2007.  Higher corn prices will decrease consumption and exports.  Corn growers have it good, price supports and government demand push with ethanol subsidization.  Both factors will increase corn production.  In 2007, we expect a new record; the first US 12-13 billion bushel corn harvest.

“I like pigs.  Dogs look up to us.  Cats look down on us.  Pigs treat us as equals.”
                                                            ------Sir Winston Churchill