Pork Commentary

Jim Long President – CEO Genesus Inc.

info@genesus.com

April 10, 2017

Global Arable Acres

Since 2006, a record increase of 179 million acres (82 million hectares) of crop production has been brought in worldwide. This increase was brought on by two main drivers. U.S. corn Ethanol subsidisation and China’s increased grain-oilseed demand. These two factors drove grain prices higher, leading to enhanced profitability that encouraged arable land into production. At the same time, new technologies were brought to bear globally that has continued to push yields higher. We have seen reports that claim global corn production has increased from 26 million metric tonnes in 2006 to 41 million metric tonnes in 2016. A huge increase.

Bottom line: more land in production, higher yields, significantly more grain and oilseed production.

This increase in production has led to lower prices for grains and oilseeds. American net farm revenue has dropped from $120 billion in 2013 to an estimated $62 billion in 2017.

Last week, we reviewed the USDA March 1 Hogs and Pigs Report. The sow herd decreased 22,000 from December 1 to March 1. There has been expectations of a significant expansion of the breeding herd. We haven’t seen it. Part of the reality is low profit margins for pigs. The other factor could be the drop in U.S. net farm revenues. With the decrease is a decline in Ag equity wealth, cashflow, and the desire and ability of banks to be aggressive Ag lenders. Our premise is that these factors are keeping a lid on expansion.

The lower grain prices we are currently seeing globally are probably affecting other areas’ profitability. Lower grain-oilseed prices in the European Union, Canada, Russia, and Brazil are affecting their total net farm revenues. The lower wealth has an effect on ag equity, cashflows, etc. that we believe will temper global swine herd production.

In countries with high swine profitability (ie China, $100 per head), any effect of other ag factors are next to irrelevant. Consequently, the Chinese are building more swine infrastructure, pig price trumps all these.

Markets

The U.S. lean hog price has lost much of the momentum it had a few weeks ago. The U.S. lean hog price has declined from in the 70’s to below $0.63 last week. In the meantime, U.S. pork cut outs have declined from the 80’s to $0.75/lb. Producers and Packers all going backwards on margins. Big reason lots of hogs – 150,000 more last week than the same week a year ago, when there was 2.159 million. When you have an inelastic supply and demand industry, this extra tonnage of pork is a real damper on driving prices higher. We expect to see a decline in hog production seasonally in the next few weeks. We still expect lean hogs can reach $0.80 in the summer.

Note: We were talking to Russia Swine Producers. They have been making in the $50 USD per head range for a significant time. The Russia producers asked us what profitability was in the U.S.-Canada market. We replied the industry hopes for $5-10 per head. The Russia producer paused, then looked at us with an incredulous look, then asked, “Why would anyone produce pigs for so little money!” Good question, and hard to answer.

Family

As we travel the world, we observe the same reality. People want to look after their families, and improve their opportunities in life. Part of that is education. Education comes in two parts – the formal and the informal. Informal can include working on the farm, and sports. Team sports can teach many things, which can include teamwork, peer respect, achieving of goals, but most of all, effort. Effort we all can control. Effort can get our children far.

As most if not all parents, I am proud of my four children. I hope they have learned effort.

My youngest son, Aidan, plays hockey. His team, the London Jr. Knights, was one of 97 Bantam teams in Ontario. On Sunday, I watched a culmination of 10 months of work, dedication, and skill, as his team was crowned Champion of all Ontario.

I hope like all fathers his life is successful. He has the desire and effort to achieve and have a good life. Hockey and team sports is a piece in the informal education of life. As parents, we have dreams for our children.