July 30, 2009
Pork Commentary
By Jim Long President - CEO Genesus Inc.
Sow Herd is reducing, Is it Enough?
Half a million, a million these are the numbers being thrown out by some pundits on how many fewer sows we need to get out before we can get profitable. That's a lot. How much misery and how many billions in losses are needed to knock out that many? The problem is there is no easy exit strategy. There are no buyers for sow units (or very, very few). There are only three options: sell (no buyers), shut down (hope things get better), or run until you run out of cash or courage. There are no easy options. It's raw capitalism or the black bear theory. Black Bear Theory!? If you and I are being chased by a black bear, I don't have to be faster than the bear - just faster than you. Welcome to the hog industry. There is liquidation underway. Tyson Foods 20,000, Smithfield Foods 27,000 and Stomp Farms 13,000 have all begun liquidation in the last few weeks (60,000 totals). There are others we know of that are not public 8,000, 3,500, and 1,800 etc... We expect 100,000 sows plus have been decided on liquidation since the first of June. There will be more on top of this as people run out of gas and with support waning if not gone from many banks and feed companies.
Other Observations
*Prices of hogs in Mexico have recovered from the H1N1 issue going from 13 to 19.5 pesos per kilogram. 19.5 pesos is approximately 67 cents U.S. live weight a pound. The higher price is a reflection of increased demand, and lower supply as Mexico's herd contracts. 67 cents a pound should increase U.S. pork imports as U.S. price points are so much lower. It also shows that in Mexico where per capita income is about 20% of the average U.S. consumer. Pork prices can be appreciably better. Cut supply, increase demand - a recipe for profitability.
*U.S. pork in storage in June was at record levels. For June obviously not a good sign. We are not getting much good news to create market bullishness. Markets are supply, demand, and psychology. We have had a dearth of positive news. H1N1 (swine flu) continues to put a negative on demand. No fault of ours but the labeling of H1N1 as swine flu is a curse. The village idiots in the media that continue to use swine flu when H1N1 is the official name deserve to be tarred and feathered.
*The desperation of producers is increasing. Meetings throughout Canada and the U.S.A. organized by producers to find solutions are abundant. Solutions offered lower weights, cut sow herd, government support, etc... The desperation of many is disheartening.
*There are proposals being discussed where the Canadian Government will fund a permanent sow buy out for Canadian producers. The U.S. NPPC appears to be opposed to this. We can't really figure why the NPPC would not support an organized enhanced sow liquidation. The last time we checked it is NPPC's funded economists who are calling for the half a million herd liquidation. Fewer sows in Canada mean less hogs in North America. An economist at Iowa State, Dermot Hayes claims Canada's program will cost U.S. producers 7 cents. Maybe we are not tenured professors but what we can't figure is how fewer sows in Canada will do anything but help U.S. hog prices. Maybe the NPPC and their wizard economists should be lobbying for U.S. Government financial aid to help producers to exit the industry if they are so committed to fewer sows. We don't see much from the NPPC but proposing for the government to buy pork. The problem is pork was going to get eaten anyway. We are not sure what buying pork and giving it to consumers does to help prices. Maybe an economist paid by the NPPC can explain. Probably moves the market up 7 cents. Always like NPPC economist arithmetic. All things NPPC does the NPPC paid economists find are price enhancing. You get what you pay for comes to mind.
*Last week we wrote that we need to work as an industry on demand. It is not easy and won't be done in a minute. But why is pork per capita consumption double in Western Europe compared to here? What can we do to get more of the food service industry? How do we get government engaged in export market access? North America is competitive in any measurement in pork production. Only focusing on supply as a panacea for all that ails us is a mistake. The challenge is when we look at our industry there is little optimism as most everyone has been beat into submission. Losses upon losses which are the brutal facts have pushed our industry into retreat. In our thoughts some of our industry leaders if they were in charge in 1941 would have surrendered after Pearl Harbor. If you want to sell, get selling. Don't wait for the phone to ring. To sell you have to be proactive. You have to be positive. We have to believe in ourselves and our product. We are cutting supply. We are not sure we can do more to increase demand. We need both.
