Eroding Margins, but Exports are Still Very Strong
The swine industry has had a nice run of profits, but during the month of April, we are getting close to a breakeven standpoint. Revenue is around $80 per cwt with breakeven costs being very close to that level. The swine industry has had a very good run of profitability and usually what we have seen from the past is that prices do run up in the summer, so I don’t see an end to profitability for the pork industry. There are, however, some points to be concerned about that I would like to address. Exports have still been very good compared to a year ago (see chart). Pork exports were up 17 percent, compared to a year ago, but there are a couple things to look at in this chart that Brett Stuart from Global Agritrends put together that are worth watching going forward.  We had a very strong March 2011 and most of that was the FMD outbreak that occurred in South Korea. South Korea was a key component in our pork export growth during March 2011. If you also look at the rest of 2011 export levels, China came ahead in a very big way from September through the balance of 2011. China continues to be a big growth component for 2012 (see chart).  If this continues, it will help pork prices yet this year.

Expansion Talk and the Cost to Expand
Maybe the only good thing about lower pork prices is  the inclination of the industry to slow down on any expansion talk. In our office, there has been more talk about this, but maybe with the market turning down, some might temper some expansion. Time will tell on whether or not we will see some sow expansion. The one thing I have seen is much higher costs to build sow units today compared to five years ago. In 2007, it would cost around $1,100 a sow space to build a sow unit. Today, from what we have heard, that same unit would cost close to $1,500 a space or $400 a sow space. I would like to ask the readers to email me at mark.greenwood@agstar.com to give me an idea about what the cost of new construction in your area is now compared to five years ago. The biggest item on this is to compare apples to apples, but I understand that this is hard to do. Every time you build something new, you improve the facility to make it better for production. Many producers are increasing weaning age, so you have more farrowing crates on your new sow unit compared to an older one. You might have a higher wean pig cost because your pig is older and heavier, but it might be better from a production standpoint from wean to finish.

Are You Thinking of Expanding?
If you are thinking of expanding, I want to emphasize that you will need to make sure you have adequate liquidity. We have many operations today that have no operating debt and are looking at investing elsewhere (example: they own more of their own finishing spaces) instead of expanding. Can you compete with these producers who have these very strong balance sheets and liquidity if we have a down turn in the swine industry? I can remember writing an article for this publication titled “An Industry at a Crossroads” in 2009. I still remember 2009 and I do not want to go back to those days again. Steve Meyer has also pointed out in multiple columns on slaughter capacity that any type of expansion will be very hard pressed to find enough slaughter capacity. Just some food for thought.