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Bottom line: It will get good and stay good

by 5m Editor
23 September 2003, at 12:00am

CANADA - Jim Long's Weekly Pork Commentary this week looks at the current market situation and the promising future ahead.


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

Next week we are going to begin a new feature, distinct from our regular market commentary. It will be a series of interviews with leaders in our industry and a venue where achievers can articulate their aspirations for themselves, their organizations and our industry---as well as their opinions. Look for it right here at Farms.com.

We believe the industry needs exposure to its leaders. Individuals interviewed in the Leader series will be industry decision makers who have major investments in the business in terms of capital, career or both. We hope you will find it interesting and a must-read.

Our first Leader piece will be an interview with Herman Lansink. Lansink is founder, president and CEO of Premium Pork, a 50,000-sow, multi-site production system operating in both the U.S. and Canada. Starting in 1998, Lansink grew Premium Pork to what it is today during the daunting markets of the last 5 years.

In that time, Premium Pork built more new sow places than any other privately-held operation in North America. Lansink is a unique individual with a bullish perspective on our industry. We think you will find his story and opinions refreshing as we start this new series, LEADER, An Interview with Jim Long.

Markets

Last week's hog slaughter was 1.972 million. Vs year ago, that's -105,000 head/-5.1%. While slaughter last week was distorted by the hurricane on the eastern seaboard there has, nonetheless, now been 5 consecutive weeks of lower slaughter than year ago. The 5-week, year-over-year decrease total is -500,000 head/-5%. This is a huge decrease in slaughter. We are confident these kind of numbers show we have turned the corner on supply and year-over-year decreases in slaughter are guaranteed to be the norm for the next 12 months.

  • The market's response is higher prices. Last September the average lean hog price was $35.78 ($26.50 live equivalent). Last week the Iowa-Minnesota average price was almost $50 lean ($44 live equivalent). A 5% decline in slaughter has resulted in prices 66% higher than a year ago. The improvement amounts to $45/head on a 260-lb pig.

  • We've had a 5% drop in supply and a 66% increase in price. During this period, price increased 13% for each 1% decline in supply. This reflects a tremendously inelastic price/supply ratio and solid pork demand.

  • If this price/supply ratio holds near this level we think dramatic year-over-year price increases will occur. Here are a couple of "for instances":

    • 4th quarter, this year: During last year's 4th quarter the average lean hog price was $42.31. But we estimate there will be a 3-4% drop in supply the 4th quarter of this year. On the low end, if the supply drop is 3% and the price/supply change ratio is 10:1, this year's 4th quarter average lean price will be $55. On the high end, if the supply drop is 4% and the price/supply change ratio is 13:1, this year's 4th quarter average lean price will be $65.

    • 1st quarter, next year: During this year's 1st quarter the average lean hog price was $48.29. Using the same calculations, low end price estimate the 1st quarter next year is $62 lean, the high end is $72.

  • Meanwhile, few producers are bullish. After being pounded by losses for too long there is little optimism and probably even less money. Nonetheless, the markets are better and the prospects are better still. The hogs we are marketing now are from breeding last fall. Since then, the breeding herd has declined significantly. The fewer slaughter hogs we have now will be followed by even fewer. Next summer's slaughter hogs are now a done deal and the numbers are bullish. Then, we expect $80 lean hog prices.

  • It will be as hard to upset this apple cart as it was to right it. There are few, if any, new sow units being built. It would take a flurry of building activity to even inch up the combined U.S./Canada breeding herd of 7.5 million. And meanwhile, obsolescence and deterioration eats away at the production infrastructure. How many sow units built in the 70's and 80's are no longer viable? And how many of them are shutting down to due obsolescence and the lack of capital and courage to renovate for the future?

  • For the first time in a decade, few feed companies are looking to be involved in production risk. This will be positive for prices. The feed industry has lost at least a billion dollars putting feed in front of their own hogs. They have proven that few of them can make it work, particularly when coupled with packer contracts that barely sustain break evens. Outside-ag investor systems have established a track record of financial debacles. There will be no magic formulas to trigger and/or backstop new production.

Slaughter numbers are declining. Prices are improving. More of the same is a done deal for at least a year. New production will have to come out of industry profit and cash flow. It will take an extraordinary long time of sustained profitability to create an atmosphere where producers will have the confidence, capital and borrowing power to replace and renew the breeding infrastructure.

Bottom line: It will get good and stay good.

Published with permission from
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Source: Jim Long, www.baconmaker.com. Reproduced courtesy Farms.com - 22nd August 2003

5m Editor