Pork Commentary by Jim Long – June 7, 2010

World Pork Expo – Preview

This week we will be at the World Pork Expo, a great opportunity to visit friends and colleagues. You can find us at the Genesus Tent. The following is part of a presentation we gave in Florianopolis, Brazil at AveSui on the state of the U.S. swine industry.

Our Perspective – USA

The United States swine industry form August of 2007 until quite recently has sustained the greatest financial downturn in its history.  There has been an estimated 6 billion U.S. dollars in losses for producers.  Many producers have gone bankrupt.  The U.S. market hog inventory on March 1^st was 4 million less than 2 years ago.  This is a grim testament to the sow liquidation that has occurred. Even though Genesus is a Canadian company, our number 1 sales market is the U.S.A.  In the U.S.A. Genesus has an office in Ames Iowa, and several thousand sows in multiplication.

The main causes of the financial losses

• High feed price spikes triggered by the U.S. government subsidies to stimulate corn usage for fuel ethanol.  This insane program drove cost of productions to $30 per head losses.

• The U.S. domestic and global economic slowdown.  Meat consumption is driven by disposal income.  Lower disposable incomes in the past one and a half years globally and U.S. domestically cut pork demand lowering swine prices.

• H1N1 (swine flu) misnamed by the authorities and the media.  The term swine flu stuck.  U.S. export markets closed (China, Russia, and South Korea).  Domestic demand declined as the mass media and government tried to outdo themselves in fear mongering.  When the dust settled, the lower pork prices caused by decreased demand had by some estimates cost U.S. hog producers $2 billion in lost revenue.

The dog has hit the end of the chain!  The upside to herd liquidation and fewer hogs is higher prices.  H1N1 (swine flu) is gone.  U.S. pork exports were up 2% last month from a year ago.  The U.S. domestic economy is improving.  The GDP is up 5%, manufacturing is up, there are more jobs, etc…  This helps pork demand. *The U.S. hog prices at writing are 86 cents lean per pound.  These are the highest prices since August 2008.  These prices are $60 per head higher than they were six months ago.  U.S. producers are now making profits of $20 plus per head. *U.S. banks are not currently enthused by the hog industry.  The $6 billion in losses has for all intents and purposes put the industry in bankruptcy if net realizable values were forced.  Banks have no interest in funding empty units or new units.  This will keep the swine industry profitable for two years. *The U.S.A. is currently exporting 25% of its total pork production.  The U.S. industry benefits from large scale double shift packing plants, packers that are financially strong (Tyson, Smithfield, JBS Swift, Cargill, Hormel, etc…), packers with the ability to fund and develop large scale enterprises. *U.S.A. export access for most if not all major importing markets has been maintained over time by the U.S. relatively high swine health status and confidence in the U.S. regulatory system. *Production of corn and soybean in the U.S.A. was at record levels in 2009.  Current spring plantings are ahead of schedule.  All suitable arable land for crops will be planted in 2010.  We expect to have feed prices stay about where they are in the coming months.

• Genetics major player is PIC.  Other companies include Genesus, Danbred, Newsham, and Gentipork.  No other companies have a major presence in the U.S. market.

*Other issues affecting U.S.A. competitiveness is increasing environmental and animal welfare legislation.  It’s getting harder to build barns and several U.S. States have passed legislation to ban sow gestation crates.  Both factors diminish interest for investors in the swine industry. *Over the next one and a half years or more we expect the U.S. hog industry will be profitable.  On April 19, lean hog futures averaged near 80 cents lean for the next year which is a $20 per head profit (Breakeven 70 cent lean per pound).  The profits are needed by producers as the equity hole caused by the huge losses of the last almost three years needs to be backfilled. In summary, the U.S. pork industry benefits from capital availability, market access, packer financial resources and scale, cost of production competitiveness, and human resource expertise. The downside is environmental regulation, animal welfare harassment, and corn ethanol subsidization. *The U.S. market has long term sustainability.  300 million people – 25% of the worlds GDP.  Domestic pork consumption and exports will make the U.S.A. a long term efficient competitor.

Summary

*Pork is the number one meat consumed in the world. Globally over the last ten years there has been about 30 million pigs produced each and every year, this is a reflection of demand. Thankfully we are producing a product that the world craves. *One absolute truth is increasing disposable income results in higher meat protein consumption. *The recovery of the Global Economy will increase pork demand further. *As an industry one major point we must focus on to increase pork demand is meat quality. Proper color, tenderness, intramuscular fat, water holding capacity are drivers to improve the eating experience of the consumer. There are differences in genetics in regards to meat quality. We expect and are seeing demand driver packer beginning to focus on pork that the consumers prefer. *In the end we are a commodity business. Our long term competitiveness depends on lowering costs and improving efficiencies. *Technologies that improve health, sow productivity, feed conversion, asset utilization and meat quality will be utilized by our industry winners. *We are a tough business but fortunately the global dynamics on pork pricing will lead to profits for the next two years.

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This post was written by Genesus