7/6/2010

Mark Greenwood - July Swine Update
Hog & Pig Report – No real surprises - below is a table that outlines some of the data regarding the June Hog & Pig Report. The US pork industry has reduced supply and it looks like 2010 total pork supply will be down between 2-3% compared to 2009. This should help keep pork prices at profitable levels for all of 2010. In addition, it should keep prices in the back for the start of 2011 barring any major demand swing or increase in feed prices. This will allow producers to continue to build some cash and pay down debt.
 
 
Friendly Cold Storage Report – More positive news for pork producers is the latest cold storage report. Total pork supply from 2009 was down over 23% and a month-to-month change total pork supply was down 35%. The drop in this number means there is less pork in cold storage and is also supportive to higher pork prices.
 

All Positive News & the Markets Go Down? – As I write this article it is a week removed from the report and futures are down on average $2-$3 per futures contract. I have producers call and ask, “How can this be?”My response back is, “You can never just assume that a report will automatically make the markets go a certain way. You need to continue to stay focused on the potential overall margin for your operation. There is still a profit based on current feed costs (corn going up almost $.40 the last 2 days) of still almost $20 per head. You need to access what tolerance level your operation can withstand and develop a risk management strategy that you are comfortable with.” The message I continue to stress is we are in a volatile market and things can change very quickly. You need to be proactive not reactive.
 
Capital Availability – I had the opportunity to speak to a couple of groups this past month regarding capital availability for pork producers. I discussed some items that lenders are looking at in reviewing your portfolio; here are a couple of items that I would like to point out:
  • You will be measured on how fast you can improve your balance sheet. In looking at some financials year- to-date we have producers that have been barley in the black, and we have others that have made up to $15-$18 a head. This is all on an operational profit perspective. We are taking out the hedge gains and or losses and just looking at what your margin has been from an operational standpoint. This will be monitored closely over the next 12 months to see how fast you can improve your balance sheet.
  • Capital is available for producers that have still relatively strong balance sheets. They will get better rates and terms for their financial needs. It will not be for expansion per se, but for capital improvements and overall operational financing, there is capital available for producers.
  • Capital available for empty sow barns – I had heard the rumors about empty sow units being filled. From a lenders view, many of the units that are empty are empty for a reason. They are not the right fit any more, from a size or biosecure area to be put back into operation. An example might be a 1500 sow unit that is a very pig dense area. It can maybe produce 650 wean pigs a week but it has a history of PRRS. If you are going to continually have disease issues what good is the operation?. Even if you can buy or lease the facility cheap, it might not be cheap enough if you always have disease problems.
  • Expansion – I have been asked this question several times already and I think capital will be very difficult to get for any new sow expansion for a period of time. I want to stress that we cannot go back to the same level as we were back in 2008. We need less supply, in addition to that, we have one less plant and slaughter capacity would be a problem if we would expand. Lets be very careful about any expansion.
Pigs Sold on the Spot Market – Currently we have very few pigs that are being negotiated on the open or spot market. Lenders have encouraged producers to have packer agreements but I think we also need to have a discussion that producers should have a certain amount of pigs to sell on the open market. Most agreements that are under a contract are based on the negotiated market. I think it is in the producer’s best interests to sell at least 5-10% of their pigs on the open market. Currently, we have too few producers that are doing this and if we could get more producers to sell some of their pigs on the open market, it might help us with some market transparency. It is something that I think we all need to think about.
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