June 8, 2009

Pork Commentary

By Jim Long President - CEO Genesus Inc.

World Pork Expo Report

 Last week in Des Moines Iowa at the World Pork Expo the weather was warm and sunny.  Unfortunately, there were dark clouds that hung over the producers and industry participants.  Two years of almost constant financial losses have torn billions of dollars of equity from our industry.  High feed prices, the global financial crisis, and now H1N1 (unfortunately labeled swine flu) has sent our industry reeling.  The implications we observed at the World Pork Expo are as follows:

   *There were fewer people than we have ever seen at the World Pork Expo.  We believe that the producers who attended were not reflective of the overall industry sentiment.  The more positive attend and the more negative stay home.  The decline in producers at the expo was an indication of the lack of positivity in our industry.

   *We heard from several producers and industry participants the need for further liquidation of the breeding herd.  The numbers ranged from 300 to 600,000 sows that were required to get prices to profitability.  God help us if that is true.  To get this many sows out of production we expect that it would take losses of $20.00 plus per head in almost a year.

   *Several packers we talked to expressed the problem of pork demand.  Since H1N1, it's taken low prices to keep product moving.  The edge has been taken off.  The high inelasticity of pork demand is hitting us hard.  This is our dilemma.  Hog prices are 15 cents a pound lean lower than a year ago ($30 per head) and we have fewer hogs.  Past supply - demand scenarios are out the window.  If demand does not recover it will be six to eight months of continued losses.  The pork brand has been tarnished.  How bad? We will find out.  We expect if there are few human deaths from H1N1 in the future, the media will move on to other pandemic scares.  The best story on H1N1 is no stories.  Out of sight - out of mind.

   *A reflection of what H1N1 did for global demand is a story from a producer in the Dominican Republic.  When the H1N1 story hit he could sell no market hogs for two weeks.  Now they are selling but at 30% below pre H1N1 prices.

   *Another industry person told of visiting his head office in Connecticut.  He explained "People in the office told him they expected pork was safe, but why risk their children's health."  On that note the statement "Pork is safe, if it's cooked properly" did not resonate as a huge confidence builder.  Notice the wholesale chicken price has increased since H1N1.

   *We talked to drug companies and vet groups who believe that there should be national policy to vaccinate all pigs and barn employees with an H1N1 vaccine.  This will get interesting.  In 1976 when the U.S.A. had the last swine flu scare it is believed that significantly more people died from a reaction to the vaccine than from the flu itself.  We're not sure how a national vaccine policy can and would be implicated.  Even the discussion like this is a negative that hangs over the markets.  Fear is not a demand driver for pork.

    Producer Retirement Program

   There has been an action group put together somewhat modeled on the U.S.A. Dairy Buyout to top load a sow retirement program for U.S.A. sow owners.  Initial plans are to raise $50 million by a voluntary subscription of $20 per sow.  Bottom line this group believes the only solution is a radical decrease in the sow herd.  The group believes that its to all producers best interests to participate and cut production.  Say if $50 million is raised, producers can decide to liquidate.  For example - You've got 1,000 sows - you offer to participate for $100 per sow.  The bid is accepted.  You get your sow salvage plus $100.  You then liquidate and you stay out of the business for two years.

For more information there is a Webinar in June 9 for the Producer Retirement Program.  Space is limited.  Reserve your Webinar seat at

https://wwwl.gomeeting.com/register/129360776

Date: Tuesday June 9, 2009

                                                              Time: 10 am - 12 pm CDT

   After registering you will get a confirmation email.

Summary

  There was little joy at the World Pork Expo but as usual there were people looking to the future.  Producers that have their own grain have weathered the financial storm better than others.  Unfortunately, it is not too rosy though when veteran players say this is the worst ever.  H1N1 hangs over us.  Just the fact that a group is trying to put a liquidation program in place tells us how bad it is.  At the end of the day, the industry direction hinges on the call of thousands of individual producers making their own decisions.  There is no monolithic body puppeteering the future.  There will be hogs.  The lower the low the higher the high.  A week ago in Russia we saw hogs over $1.00 per pound.   Pork remains the number one meat in the world.  Demand will recover from H1N1 but how soon and at what further costs that is the billion dollar question.