This past week we spent in Russia.

Our Observations:

• Russia’s economy is showing vitality if the number of buildings under construction is any indication.

• The Russian Market Hog Price is up to 85 rubles a kilogram or about $1.25 U.S. liveweight a pound.  Top producers are making over $150 U.S. per head.

• Wheat is approximately $4.00 U.S. or $160 U.S. tonne in the Southern Kuban region 1,000 miles south of Moscow it is about $5.00 U.S. a bushel in Voronezh, half way between Moscow and Kuban.

• Soy meal is $500 U.S. ton.

• When we were in Moscow Sunday, August 15 the city was covered with smoke caused by forest fires in the area.  It was nasty.  Since then the weather has cooled and it has rained some and there are few if any forest fires.  On Saturday the temperature was 65 degrees F.

• In the Voronezh region, 500 miles south of Moscow as we travelled around we saw many areas with forest fire damage.  The scale of the fires we saw were not individually large with many just a few hectares or acres, but there were lots of them.  Some houses were burned out.

• Voronezh has soil like Illinois.  It is black earth, the drought has been intensive.  Record high temperatures in the 40 C or 104 F. and no rain for 6 weeks.  We were in corn fields with 4 inch corn cobs.  The only time I saw crop damage like this was in Northern Indiana several years ago.
• The wheat crop had been harvested but it was only about 40% of normal in the Voronezh region.

• Russian people told us the heat and lack of rainfall as unprecedented.

• A week ago the Russian Government banned the export of grains until January 2011.  Several producers told us they would not sell grain until the embargo is lifted.  If non – sales happen to any great extent the Government’s attempt to limit grain prices might not work.

• In the Kuban district in the south between the Black and Caspian Sea the wheat crop was harvested before the drought took a major toll.  Yields in that region were down but not by much (60 – 70 bushels per acre).  Currently seeding has begun for fall wheat.  In Kuban, corn and sunflower crops have been hit by the drought being later crops.

• One farm operation we visited had a large cropping enterprise with just less than 450,000 acres (200,000 hectares).  59 new John Deere Combines and 63 John Deere tractors.  We have to admit we never thought in our life we would be discussing where to build a new swine barn in a 100,000 acre tract of land (50,000 hectares).  Bio – security distance is under control.

• In Russia there is a wide range in productivity on swine farms.  Some 12 pigs per year, others 24 plus.  With the higher grain prices and the economic shock it will cause in some operations we expect there could be several low productivity producers go out of business.  On the other hand, top producers are doing well.  A 6,000 sow operation with Genesus Genetics is reporting to us 24.3 hogs marketed.  In this operation we had placed full time Genesus management and a complete training program.  With super high hog prices and 24 plus hogs per year per sow.  It is happy days!!

• As I wrote last week, I am travelling with my 13 year old son.  It is an eye opening experience for him.  Different culture, different language, and a different economic model.  It is a good education.  As per usual, when we travel we have been treated well by our hosts.  I will always marvel on how Ag – people in general are so hospitable around the world.  In one town of 70,000 people in Voronezh the police chief heard we were there.  They don’t get many foreigners.  He came to our hotel, introduced himself, and insisted we visit their new hockey arena (he’s a goalie), after he took us to a huge fertilizer facility with 3,000 employees.  Russian’s like American’s are proud of their community.

• This coming week we will be visiting Prague and the heart of Ukraine’s grain production.

Other News

Statistics Canada released July 1^st Inventory Report.  No big surprise as Canada’s swine inventory countries to decline year over year.  Market hogs are down about 300,000 head while the sow inventory has declined over 60,000.  Live exports to the U.S. were down April – June about 200,000 in the quarter year over year.  The bottom line is smaller sow herd, smaller inventory and smaller exports.  This is price supportive now and in the future.

In the last two weeks prices in Brazil have risen 10% across the country.  Prices in the South – East are $1.70 U.S. per kilogram live weight (75 cents live weight per pound) and in the South, $1.40 U.S. a kilogram (about 65 cents U.S. per pound).  As we have written before, Brazil and North America are the big hitters in Global Pork Exports.  To have high prices both countries need to have prices not undercutting the other.

Last week in China the price of pork had risen for 10 straight weeks and hit 17.09 guan per kilogram (1.10 U.S. per pound).  Reports say the uptrend in pork prices was due to an outbreak of diseases.  The rise in breeding costs, Government policies and the impact of the flood in some regions.

Summary

U.S. hog prices are holding in the low 80’s lean per pound.  We expect a seasonal price decline but we are buoyed by the prospect of prices staying strong.  Canada’s hog supply is down.  Brazil’s prices are up (meaning supply is down) and China’s prices are up (supply down).  Less pork always leads to better prices.

There is no significant sow herd expansion underway.  We know of dozens of existing sow units that are sitting empty.  In the breeding stock business it is our job to know where the empty sow units are and sell gilts if something happens.  Nothing is happening?  Why?

Some Observations

• There are excellent empty sow units and marginal ones.  Some have economy of scale – some don’t.

• It takes capital to acquire an empty sow unit but just as importantly it takes operating capital.  Both long term and short term credit is extremely hard to get.  Lenders have lost money in their swine accounts.  There is little enthusiasm in the banking community and for debt exposure in the swine industry without significant risk aversion (equity).

• Producers don’t have cash or resources to self fund expansion.  After the $6 billion lost in equity over 30 months.  3 months of profit have not come close to replenishing the hole.  Maybe at the most, 15% of the equity loss has been recovered.

• It is interesting the number of reports we have received from producers who tell us their profits over the last few months have been limited by hedging positions that was pushed on them by bankers.  Their positions they were forced to take have cost them up to $20 per head in lost opportunity.  Just as importantly their equity hole has not been refilled at as rapid a rate as possible.

• Another issue is many empty sow units have gone empty under financial duress.  Consequently, there are issues of ownership, debt, and control.  This tangle of circumstances makes it hard or impossible to execute purchases.  Tangles will get sorted out in time but it might take many months.

• Also empty sow units that are in areas of high pig density are less attractive.  Diseases have costs that at times can lead to lower productivity.  Health is becoming more and more important and concerns of such affect buyers and lenders.

• Bio – secure sow units that are empty are in areas of few people and a in a lot of cases far from markets and potential owners.  To find and staff a sow unit in an isolated area is always a challenge.  To own a sow unit far from where you live is in itself a leap of faith and risk.

Other Observations

• The grain market to say the least is volatile.  U.S.D.A. comes out Thursday with a crop report that has record U.S. corn production.  Corn price goes up.  A lot of what is happening in the markets is the reports from Russia – Ukraine of drought.  As we write we are on a plane bound for Moscow.  Over the next two weeks we will be visiting some of our customers in Russia – Ukraine.  Producers with 100’s of thousands of hectares (acres) of crop.  We will be on the ground – we will see.  We will report.

• China hog prices have jumped 20% over the last few weeks.  This is positive.  Higher prices in China means stronger demand.  Even a small percentage increase of pork exports to China – Hong Kong will support hog prices.

• We were talking to associates in Brazil this week, hog prices in Brazil are the same as the U.S.A.  That’s good for both countries.  As global competitors for many of the same export markets are lower price in either Brazil or the United States limits profit and export opportunities.  Strong prices in both Brazil and the United States reflect strong global pork demand and a lower pork supply compared to a year ago.

Summary

Like many other business we sometimes work too much and are away from home far too often.  It is the price we pay.  Fortunately, on this trip I am travelling with my 13 year old son.  Over the next 16 days he will see much of Russia, Ukraine, and the Czech Republic.  It will be an eye opening experience, one that he should remember long after I am gone.  Part of what we want him to see is the rapid transition and evolution in these countries – that the values and dreams of most people have no borders.  Food, shelter, and to provide for a better life and opportunity covers most parent’s ambitions.

Abracadabra – the U.S. consumer woke up to the media reports last week of pork bellies (ie. Bacon) reaching record prices with wholesale belly prices reaching over $1.50 per pound. This is a historical record.  A year ago wholesale bellies were in the 40’s.  This is a classic case of the surest cure for low prices are low prices.  Unfortunately when the national media discovers a story it is many times the sign of the stories zenith.  Bellies will stay high but we don’t expect new records in the coming weeks.

Low pork and bellies in cold storage and weekly hog marketing’s continually lower than last year in compounding supply issues relative to demand.  Last week the U.S. hog marketing’s were about 140,000 fewer hogs than the same week a year ago.  Give or take 25 million pounds less pork for the week compared to a year ago.  Week upon week of lower pork supply is pushing prices higher as the only way to ration limited supply is higher prices.  There is little wonder hogs are bringing $40 plus more year over year.  We can’t say we are surprised as we predicted significantly higher prices this summer compared to the usual suspect ag-economists that as late as January were predicting lean hog prices in the 60’s this summer.

We guess it is a difference in perspective.  Every day we are exposed to the cost of hog ownership and we have seen the financial challenge producers have experienced.  Far from an academic exercise we saw the real pain of swine production of an industry losing $6 billion in equity.  No way this collective pain was not cutting production.  Gilts weren’t being retained.  Production corners were cut for lack of capital and courage.  There would be less production.  We also believed and wrote that the U.S. H1N1 (swine flu) experience (scare) of 1976 would be repeated.  Lots of noise! Nothing much would happen and people would soon forget.  They have forgotten H1N1.  Certainly record high belly and bacon prices are a clear indication of that reality.  Consumers are voting with their dollars that they want bacon.  Bacon, a product that has taste and flavor, it is certainly not what you would call low fat.  This in itself might be telling our industry what the consumer wants and are definitely ready to pay for.

Other Observations

• The Russian drought has certainly jolted our feed costs.  Since July 27 September corn has gone up 45 cents per bushel ($3.62 to $4.05) wheat is up from $4.64 on June 29 to $7.25 per bushel last Friday.  We are leaving for Russia – Ukraine this Friday and will be in the areas that are drought affected.  We will report our first hand from the ground observations.

• Weekly Iowa – U.S. Minnesota hog weights are close to a year ago.  This year 267.0 pounds last year 266.8 pounds.  A few weeks ago this year’s weights were almost 4 pounds higher than a year ago.

• Higher feed prices have taken some edge off the early wean and feeder pig market.  Last week U.S. cash early weans averaged $42.05 and cash 40 pound feeder pigs averaged $56.30 with a huge range of $44 – $65.  Last year feeder pigs were about $15 and were at their extreme low. Over the next few weeks we expect to see early weans – feeder pig prices to stabilize.  There is still a pig shortage and we expect feed prices will stabilize when the reality of a record corn crop sinks in to corn prices.

• We all have heard of the farmer owned Illinois Packing Plant Meadowbrook that failed and is sitting empty with millions of dollars lost.  A contrast to the Meadowbrook unsuccessful venture is Conestoga Packers in Ontario wholly owned producer plant.  This group of 150 family farms is currently handling 14,000 head a week up from 3,000 a few years ago.  Recently Conestoga announced further expansion in processing which could add up to 40 new jobs to the current 350.  Conestoga is working.  A testament to the vision and leadership of the family farmers who have stuck together to truly build a pork product from the farm to the fork.  A belief and commitment in themselves and their industry for today and the future.

Summary

Hog prices are going to stay strong in the coming months.  Hog supply is short.  Demand is strong.  There is no significant expansion.  The empty sow barns are not being restocked yet and new sow barns are a figment of imagination.  The equity hole is being refilled.  Unfortunately the equity hole is still a crater.

U.S.D.A. pork cut outs were 89.82 cents per pound last Friday, getting closer once again to 90 cents per pound.  With August lean hog futures at almost 87 cents USDA cut outs will probably need to push to 95 cents plus to get lean hogs back to near 90 cents per pound.

Other Observations

• The sow price is very strong 450 – 499 pound sows were $64.34 per pound live weight last Friday, while 500 – 550 pound sows were 66.15.  A 550 pound sow will be bringing well over $350 each. (Except in Canada where for some unexplainable reason there is about a $50 per head lower price at all weights).  U.S. – Canada marketing’s are running about 9,000 head a week lower than last year when there was large liquidation underway.

• A year ago we were in the major media hysteria stage about H1N1.  Was it 100 or 150 million people who could die worldwide?  Talk about a nightmare.  U.S. hog prices last year were about 58 cents lean a pound.  Now with fewer hogs and better pork demand we are getting $40 per head more.  That’s about $100 million more a week for U.S.A. – Canada producers.  We all need it.

• We aren’t picking up there is much expansion underway.  Maybe some herds are increasing internally eg: 2500 sow unit was running at 2200 now is going back to 2500.  There are discussions about empty sow units getting fired back up but so far mostly talk with little action.  It takes capital and courage.  Both dynamics were severely hammered the last three years.

• Pork bellies last week were trading at $1.33 per pound – a year ago they were 63.20 cents per pound.  That is 70 cents per pound higher than a year ago or more than double.  Who says consumers want lean meat?  Pork bellies are never lean.  Consumers want taste and flavor as part of their food preference.

• One of the reasons pork bellies have reached possibly the highest prices in U.S. history is the fact U.S. bellies in inventory June 30 are 54% of a year ago.  Total pork stocks are the lowest they have been since September 2005.  The low pork stocks will take away leverage from packers over the next few weeks.  As the old saying goes ‘The cupboard is bare’ you can’t have producers lose billions of dollars and keep supply from falling.

• Corn is pushing $4.00 a bushel.  Feed price increases are raising the cost of production for hogs.  Thank goodness the U.S. corn crop looks as good as it does.  $4.00 a bushel corn with maybe the best crop in history?  What the heck are we going to do if ever there is a drought?

• Some increased packer activity in Canada.  There are plans to restart the Moose Jaw, Saskatchewan plant, increase capacity at Quality Meats, Mitchell Ontario plant and restart Morrison Meats plant in Cambridge Ontario.  Not sure if it is being stimulated by Packer Margins but we would like to think so.  A large shareholder in a major packing company recently told us that profitability in their industry was excellent.  If true, this will stimulate new capacity.

Summary

Lean hog prices have pushed into the 80’s with pork cut outs almost 90 cents.  Low pork in storage totals has diminished Packer – Retail price leverage.  With pork exports still quite strong we expect hogs to keep going in the 80’s until October.

Last Friday October lean hog contracts at 77.025 and December at 74.350 closed from what we can determine were life of contract highs.  Certainly some producers will look at these levels as good selling opportunities.

Last week 53 – 54% lean hogs were averaging nationally 80.32; a year ago they were averaging 60.76.  That is 20 cents higher this year ($40 per head).  Cheques are certainly bigger!  Everyone needs it.

Last week’s U.S. Hog Marketing’s were 1.961 million down.  68,000 head from the same week a year ago.  Less hogs, no H1N1 (swine flu), and better demand is leading to the $40 per head difference.

Other Observations

• Last week National Direct Cash early weans averaged $42.92 – 40 pound feeder pigs $61.41.  Demand is good for small pigs and prices are counter – seasonally strong.  What is interesting is reports that we are hearing of reluctance of buyers to sign long term contracts.  The reality of the losses in the last three years and the price volatility of both grains and hogs have made long term commitments a nervous proposition.

• September CBOT corn a bushel dropped to $3.71 a bushel last Friday down 24 cents a bushel in a week.  Crops look excellent in most areas.  This significant lower year over year pork in storage bodes well for hog prices in the coming weeks.  August lean hog futures of 83 cents plus are not an aberration.

• U.S. retail pork prices hit record highs in June at $3.14 per pound.  Consumers are definitely wanting our product this is a great sign of demand.  We have producers making money, packers making money, and consumers voting with their dollars to buy our pork all positive.

• U.S. May Pork Exports were up 22% in May over a year ago.  This has helped push U.S. hog prices up year over year $40 per head we have seen in the last three months.  When it’s raining enough that lawns don’t need watering at the end of July.  Enough moisture for crops is not an issue.  Read this week that corn is $2.20 U.S. per bushel in some parts of Brazil.  That doesn’t work for corn growers.  There is no corn ethanol in Brazil.  Cheap feed for livestock and poultry though.

• The U.S.D.A. released July 1^st Cattle and Calve Inventory last week.  The total cattle and calves were 100,800 million – down 1.2 million head from the year before.  Cattle numbers continue to decline year upon year.  Less cattle creates Red Meat substitution opportunities for pork.

• U.S. pork in storage at the end of June was 410 million pounds, down 167 million pounds from a year ago and down 36 million pounds from the end of May.

Some points from the National Pork Industry Conference two weeks ago

• Compared to 1950 the U.S. produces 176% more pork with 44% fewer sows.
• Compared to 1930 U.S.A. produces 333% more corn on 11% more acres.
• Compared to 1930 69% more wheat on 6% fewer acres.

Obviously technology has pushed yields to extraordinary levels but you can see the obvious benefits of the effort and capital put into corn hybrids compared to lesser efforts in wheat.

Swine productivity continues to accelerate.  We see herds reaching 35 pigs per sow per year in the not too distant future.  The large structural frames of breeding stock needed to have the material capacity to carry large litters also gives the length and frames to carry large carcass weights.  We currently have customers producing over 7,400 pounds of hogs per sow per year.  8,000 pounds will soon be reached.

Food productivity has driven the high standard of living we have today.  In 1908 50% of an average American annual income went for food.  Now it is 10% of income.  Less money on food, more money for cars, housing, clothes, vacations, etc…  Agriculture has been the catalyst for the American dream.  How many Americans realize that?

By: Jim Long President – CEO Genesus

Last week Friday, Iowa – Southern Minnesota averaged 75.29 lean per pound.  This is profitable but not great.  A year ago lean hogs a pound in Iowa – S. Minnesota were hovering around 57 per pound.  The good news – we are almost $40 per head better than a year ago, the bad news: we have a huge equity crater to fill and although we are profitable, it is not mortgage lifting levels.  A year ago the hog to corn ratio was around 16 while currently it is around 23.  Both numbers are a true barometer of profitability potential.  Usually the hog to corn ratio under 20 means red ink.

• We continue to be amazed at the counter seasonal strength of cash small pigs.  Early weans $45 and 40 pound; feeder pigs $65 average on the U.S.D.A. report.  Last Friday the DTN – Ag data livestock margin calculation indicated you can pay $55 for a 45 pound feeder pig.  The current stronger cash price of %65 is an obvious refection of strong demand and limited supply.  No one pays more than they have to if they can find alternatives.
• The U.S.D.A. continues to revise the current corn crop projections usage and carry over.  We expect at the end of the day, the only thing that will be much better is U.S. weather the next 6 weeks.   Rain means lower prices – no rain means higher prices.  It will be volatile.
• One of the factors supporting a hog price around $40 per head more than a year ago is less pork in storage with May 31 number minus 23% compared to a year before.  140 million pounds less year over year.  With a lower pork storage number year over year the ability to take pork out of storage to keep prices down becomes more difficult.
• We had some visitors from South – East Asia this past week.  Market hogs are $1.20 U.S. per pound live weight.  Their market hogs are slaughtered daily as fresh pork.  The fresh pork (mostly unrefrigerated) limits most import pork dynamics as local consumers buying patterns insist on fresh pork products.  Feed is all imported and costing $120 per head farrow to finish.  Dead stock is fed to crocodiles which are kept for leather production.  Only the crocks bellies are used.  Crocodiles prefer pork to chicken.   Even crocodiles see the taste difference!
• This week we will be attending the National Pork Industry Conference in Wisconsin Dells, it will be a good indication of the mind set of our industry.  Last year the speakers were obsessed with the idea that massive supply decreases were necessary were to return to profitability with no emphasis on demand.  We did not have massive liquidation since last July but fortunately domestic and global demand has improved (H1N1 has disappeared from the news).  Profits have returned anyway.
• What a difference, our industry took its lumps last year to the tune of billions of dollars with H1N1 being misnamed as swine flu.  We received no government support compensation despite it having nothing to do with us.  CNN was no friend of ours!  Now watch CNN and their bleeding heart renditions for shrimp farmers of the Gulf.  Where were CNN and other media outfits when we needed help?  What they did everyday was call it swine flu.  A kick in our gut.  Now, shrimp farmers (farmer is obviously a subjective word) whose only interest is a boat are to get compensation?

  

• One of the greatest businessmen of all time is Warren Buffet of Berkshire Hathaway.  Recently I read a book called The Tao of Warren Buffet written by Mary Buffet and David Clark.  Some quotes:

“Never ask a barber if you need a haircut.”

“Forecasts usually tell us more of the forecaster than the forecast.”  True enough!

“There is nothing like writing to force you to think and get your thoughts straight.”

“Investment must be rational, if you don’t understand it, don’t do it.”

“If past history is all there was to the game, the richest people would be librarians.”

Obviously Warren Buffet is an extraordinary businessman who has identified leading companies and industries for long term returns and values.  One of the most interesting investments is Berkshire Hathaway’s major presence in CTB (Chore – Time Brock) and Pig Tek, a hog equipment company.  Buffet has made few long term investment mistakes.  When we observe the significant investment in the swine equipment business we see it as an affirmation of the potential long term growth of the hog industry.  The expected 40% growth of hog production globally by 2025 will not be missed by such a shrewd investor.

The U.S. – Canada hog market is languishing in the mid 70’s. The rapid appreciation of the U.S. dollar since mid April relative to other global currencies has taken the competitive edge of U.S. pork exports.  The 10% plus increase of the dollar has in many ways been reflected in the lower price received for market hogs.

U.S. hog marketing’s continue to stay below the year ago levels (-3.6%) which is a reflection of smaller inventory that the U.S.D.A. continues to find.  This is positive for prices to stay above profit levels.  Unfortunately, our industry’s dilemma is that hogs in the mid 70’s, although profitable is no panacea for the huge equity hole that was created in the thirty months prior to April.  Mid 70’s might be creating $12 – $15 per head in profits but is no bonanza!

The one factor that might be a silver lining in the mid 70’s price is that it has probably taken whatever exuberance there was out of the need for expansion psychology.   Some days we wonder if the only way we can get pork buyers excited about our industry is to send them Viagra.

Other Observations

• Sow prices continue to be strong with 500 – 550 pounders bringing 57 cents per pound last week.  Sausage demand must be good.
• Cash early weans are mid $40, 40 pound feeder pigs mid 60’s.  Extremely strong prices for this time of year.  Obviously reflecting lower pig supply and empty finishing spaces chasing them.
• U.S.D.A. last week revised the corn crop  scenario to show lower inventory and supply.  This bounced corn 30 cents per bushel higher.  The corn market the next few weeks will be weather driven.  We expect it will be volatile.  U.S. corn exports appear to be slowing.  The higher U.S. dollar is affecting corn export demand just like it has had a negative effect on U.S. hog prices.
• We still hear of producers considering quitting – they are tired.  Buildings and equipment continue to age and deteriorate.  Generational transition is an ongoing dilemma.  Many have told us they don’t want their children marooned in the swine industry.  Demands for continual  gains in productivity to remain competitive weighs on people.  All of this adds up in our opinion to continual erosion of the production base.  A reflection of this is hog barns that burn down.  How many are rebuilt?

Global Demand

All is not bleak.  The International Meat Secretariat  is projecting the global growth of beef and pork of 40% by 2025.  To service this meat demand we will have to produce upwards of 400 million more hogs globally a year.  Over the next 15 years that’s an increase of 30 million plus more globally per year.  That is expanding Canada’s production each and every year.

We believe the global pork for export will be mostly positioned in the U.S.A. and Brazil, but all countries will benefit from the increase in pork demand for increasing populations.

The main take home message is pork is wanted!  44% of global meat protein consumed is pork.  The global pork demand is growing.  We are not producing an unwanted product to the contrary a projected 40% increase by 2025 (2.5% per year) is a great reflection that we are in an industry that has legs.

June 1^st USDA Hogs and Pigs Report

1000 head

Other Observations

• The Market inventory shows a year over year decline of around 1.8 million head.  That’s about 75,000 a week less hogs coming to market year over year over the next four months.  Definitely fewer hogs and that will continue to support market hog prices.

• The June USDA report indicates that the breeding herd is about 180,000 head fewer than a year ago.  On the flip side it indicates the breeding herd grew 28,000 from March 1^st.  We expect to see little expansion over the summer quarter, a quarter that historically has been one of liquidation and of little expansion.

• The March – May Pig Crop was around 800,000 fewer than the same quarter a year ago.  This trend to fewer pigs will continue through the year with the practical and biological fact it is now almost impossible to place gilts and get their offspring to market before next summer.  We can now almost guarantee profitable hogs into the fall of 2011.  After that the jury is out, and looking for evidence.

• The March – May litter size is up 4/10 of a litter in the last two years.  The genetic strides in our industry are being seen in the market place.  Genetic gains of .25 a litter are still being made.  We expect this productivity trend to continue.  Swine Genetics Companies that can’t keep up will be punished in the marketplace with lost business.

• The June Report shows of the 180,000 fewer sows year over year.  There were 110,000 less in North Carolina, Texas 40,000. Other smaller non Midwest States 45,000.  For all intents and purposes the Midwest breeding herd held over the last twelve months.  Why?  We would guess land value, packer availability, faith in the future?  If you went to war there is no doubt you want to fight in a unit of wild bunch pig producers.  Fighters who despite all odds survive.

Ontario Pork Congress

Last week we attended the Ontario Pork Congress.  Our observations:

• Ontario has downsized about 100,000 sows from its peak inventory four years ago going from about 430,000 to 330,000 sows.  What we found surprising is the generally positive attitude of the attendees despite the dismal economic reality of the last few years.

• We were told that existing sow units are valued at between 10% to 40% of new.  Fortunately producers selling out have been helped by the high value of farm land which is now touching $10,000 per acre.  We heard of no empty sow units being restocked.

• One of the big issues with Ontario producers is the future of Maple Leaf Foods slaughter plant in Burlington Ontario.  With a capacity of about 42,000 head per week (currently operating at about half capacity), Maple Leaf announcement a few weeks ago to try to actively sell the plant has made many producers nervous.  Not so much about them selling it but the fear that it might be closed.  A closure would short Ontario’s slaughter capacity below production.  Unfortunately with Ontario’s weekly marketing’s between 70-80,000, a new potential buyer has to wonder about potential supply.

• Ontario’s industry is dominated by family owned and operated land based businesses.  From what we can determine, the largest producer has under 20,000 sows with maybe 5 producers over 5,000 sows in the 330,000 sow total inventory.  As a group they are good producers and most will and can stay in as long as they want.

Summary

The June USDA Hogs and Pigs Report confirmed what most expected – Fewer pigs and hogs.  We expect cash prices to trend higher, soon reaching into the mid 80’s.  Our industry barring an unforeseen health or trade issue will be profitable through the summer of 2011.

The Iowa–South Minnesota market closed at $77.51 lean lb average last Friday.  The market is better than a year ago’s $56.00 lb/lean or about $45.00 per head higher.  Last week’s U.S.A. weekly hog marketings were 2,011 million, down 60,000 from the same week a year ago.

• To see market movement potential, watch for the average weight of hogs shipped.  Last week Iowa-Minnesota was 2.0 lbs live weight heavier than a year ago.  Slaughter weights usually start to decline fast after June 15 as hot weather comes into play.  We need to see slaughter weights declining not only cutting pork tonnage, but also indicating currentness of market inventory.

• This Friday the USDA will release the June 1 Hogs and Pigs Report.  We expect that year over year breeding herd and market inventory will continue to show declines.  We would not be surprised that the inventory will be at multi-year lows.  Reinforcement of low inventories could very well push prices higher.

• It appears there will be almost total shelving of the Other White Meat program.  We don’t imagine it can be totally stopped as the National Pork Board paid several million dollars to the NPPC for the rights to the Other White Meat slogan.  Total abandonment would in all likelihood force a right down on the National Pork Board financials.

• The Other White Meat program leaves a legacy of lost meat and poultry market share and a drop of U.S. per capita pork consumption.  It is great to see the wisdom of the current National Pork Board to move away from the Other White Meat program.

• From what we can read, consumer surveys indicate major drivers as purchase motivators of pork are taste, flavor, and tenderness.  Taste and flavor seems to make sense.  In the twenty years plus of moving to lean hogs, we must ask why bellies and ribs have increased in relative value (not ever lean), while leaner products like hams and loins have dropped in relative cut-out value.  Why are 500 lb sows now 60¢ lb live weight, while market hogs are lower in price than sows?  Sows mostly go into sausages – never a lean product.  Taste, flavor, juiciness – the purchase habit of consumers are telling us that’s what they want.

• In our opinion, the key to develop increased consumer demand is to adjust our pork from total lean to outside lean on the carcass, but with enough intramuscular fat that enhances taste, flavor and juiciness.  This can and is being done through multigenerational genetic development.  Minimize outside carcass fat while controlling intramuscular fat.  New Iowa State developed software enables the ultra sound measurement of live breeding stocks for intramuscular fat.  This, when augmented with detailed sibling carcass analysis, allows for selection of breeding stock that will meet the consumers desires of taste and flavor.

• Our own experience from marketing breeding stock is that producers put little or no consideration in meat quality characteristics when purchasing swine genetics.  We have heard more than once, “meat quality makes sense, but packers don’t recognize or pay us for it, so why should we consider it important.”  In one sense all true, except if we look at our industry and how to enhance demand and value, it would make sense to provide pork the consumer wants.  Taste, flavor, and juiciness; it’s the key to driving pork demand and in turn profitability.

• This past week we had visitors from China with plans to put down up to 500,000 sows in their country.  To keep it in perspective, that is less than 1.5% of China’s sow herd.  The scale is mind boggling.

Summary

USDA Hogs and Pigs Report to be released Friday will be the next big factor in price trends.  We still expect cash lean hogs will reach back to the mid 80’s over the coming weeks, unless the U.S. dollar strengthens significantly making pork exports more expensive for buyers.

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