Jim Long President, Baconmaker Genetics / Wood Lynn Farms, Inc.

At 1,968,000, U.S. hog slaughter last week almost touched its nose to the 2 million/week mark. It was a record number for this calendar week. It was 3.6% above the same week a year ago. What the heck is going on? Weren't we supposed to have fewer hogs by now? Some thoughts:

• Over the last 5 weeks the U.S. slaughtered 1% more hogs than a year ago, or approximately 100,000 more.

• During the last 5 weeks approximately 20,000 more slaughter hogs/week than normal came from Canada due to the lack of markets there because of the mad cow crisis.

• Last week's surge could have been stimulated by hogs having to be delivered by their August 15 hog contract deadline.

• Demand kept the huge kill last week from being negative. The Iowa/Southern Minnesota price last Friday for 51-52% lean hogs was $56.59, 33% higher than a year ago. That price was well over $20/head better than year ago despite both higher slaughter volume and higher weights, a demonstration of positive demand.

• Last week the packers' price held almost steady from the previous week despite 160,000 more hogs than the previous week. The packers must have wanted the hogs and could move the meat.

Economists' Projections

Every year Ron Plain, ag economist at the University of Missouri, surveys economists in the U.S. to get their price and production projections for the coming year. This year Mr. Plain surveyed 19 economists, 13 of whom are tied to major universities. Here's a summary:

The average price of the 6 quarters of economist projections is $41.63. I'm not sure, but in my world that is a price that would do little to generate profits. Since the last 7 quarters have been negative, it is hard to get very excited about the idea of just trading dollars for the next 6 quarters. The following graph illustrates our industry's reality. Since the fall of 1997 there has been 16 quarters of losses and only 6 quarters of profit.


Is it any wonder many producers question the future? A further illustration of the stark reality of the hog industry is the financial results of PSF Group Holdings, the parent company of Premium Standard Farms. With over 200,000 sows and over 4,000 employees, Premium Standard Farms is the 2nd largest hog producer in the U.S. and the 7th largest pork processor.

In the quarter ending June 28, PSF lost $1.7 million. That quarter was considerably better than the same one a year ago. Then, PSF lost $4.5 million. Moreover, PSF has lost money the last 7 quarters.

Many producers are intimidated by the size of organizations like PSF and possibly rightly so. But at the end of the day, being large and integrated is no guarantee of profitability. Every day the people at PSF try as hard as they can to generate profits but they----like every other participant in the hog industry---find it hard, if not impossible, to make money at the prices we have been receiving. There is no magic. Corn is corn, labor is labor, electricity is electricity. The idea that large organizations have a cost of production advantage has not been borne out by the financial statements available from publicly traded companies.

A consequence of little or no profitability is little or no investment in new sow units. It's quite hard to show an adequate return on investment at prices and break evens we have had over the last 5 years. And meanwhile, current sow slaughter data we are seeing indicates on going liquidation.

An aging production infrastructure and a declining sow herd must come home to roost. When we see a breeding herd that is in excess of 4% smaller than it was a year earlier, it is hard for us to agree with the ag economists in Ron Plain's survey who see no reduction in production in the 3rd and 4th quarters of 2004. It just doesn't make sense.

We wonder how many of the 19 economists put any of their own money on their projections (which prudently seem quite close to Futures lean hog prices). Being a tenured ag economist at a major university is about as far as you can get from price risk in the hog industry. Maybe that disconnect is why the automobile industry (like virtually every other non-ag industry) doesn't take advice from tenured professors.

Here's What We Think......

We see fewer hogs and prices 5-10% higher than the ag economists project in the coming quarters. Over time, you cannot have significantly fewer sows and the same number of hogs.

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Source: Jim Long, www.baconmaker.com. Reproduced courtesy Farms.com - 18th August 2003