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Pork Commentary: Darwin - Some Must Die that Others Can Live

by 5m Editor
1 September 2009, at 9:24am

CANADA - This week's North American Pork Commentary from Jim Long.

The North America swine industry is at a point of real crisis. Billions of equity and cash have been lost over the last 24 months. We read the other day where total industry losses surpass by 100 per cent the great price collapse of 1998 – 1999. What’s even worse is the lean hog futures indicate losses in the $30 per head range for the next six months. It’s piling up and on.

The H1N1 crisis (unfortunately tagged swine flu) continues to rear its ugly head with ongoing claims by Government and Agencies of big problems this fall and winter. Certainly they don’t know what’s going to happen but they are doing the rear – covering program. If it’s a problem they are covered. If not, oh well, they were wrong.

In the meantime thousands of producers are each looking at their own circumstances. There is no monolithic decision making group. Everyone has their own unique position. It takes capital and courage to continue. Some are done, quitting from lack of will, faith, and in many circumstances out of cash. Others are digging in, committed to our industry, believing in its future. It is interesting being in the genetic business and seeing the producers who believe in survival now and in the future is about getting better with some upgrading to their genetics. The net effect of these plus – minus circumstances is sow liquidation at 69,000 two weeks ago and more coming.

The grim economic reality is pushing bankers, feed companies, and producers to the point of surrender.

Other Observations

  • We are getting strong indicators that some of the pork powerhouses that have done little or no sow liquidation up until now are beginning to. We understand some are looking at a 15 per cent reduction with rumors rampant that these percentages are being encouraged strongly by their financial institutions. It makes sense in any context. A significant industry cut back of hog production will only strengthen prices. It’s now a matter of survival, many producers need increased operating lines and/or are in breach of loan covenants, the trade off is mandates from their lending institutions. Breeding herd reduction is probably one of these mandates.

  • At some point small pig supply is going to drop significantly. There has been a large reduction of sows in Canada that produced small pigs. All these pigs were sent to the USA These herds are just finishing liquidation. We will see right soon, 20,000 less a week available leads to more finisher space chasing fewer pigs.

  • The hole we have dug is huge. Losses could be approaching $1000 per sow farrow to finish by the end of this December. The equity loss will take a long time to recover for the survivors. What are really sad are the real people stories. The devastation on people and their families is heart wrenching. Statistics have no soul. It’s unfortunate that pork demand could not have been sustained at a level that there has to be so many casualties. We all know of family’s financially smashed by the effects of the corn ethanol boondoggle, H1N1 (swine flu) misnaming. The unfortunate part is all producers want liquidation to adjust supply. It is happening. The end result is casualties. It’s too bad for most to live there has to be death. Quite Darwin, but real.

Any Good News

  • Hog prices in the 60 cent US per pound live weight plus range in Mexico is increasing imports from the USA
  • South Korea has made pork imports easier. Prices there are over $1.20 US per pound.
  • The grain supply at this time looks more than ample.
  • A weak US dollar will help exports.
  • The coolest summer weather in the U.S Midwest in recorded history put weight on hogs and made them grow faster. The weather factor will normalize as we go into the fall. You only sell them once.
  • Liquidation of the breeding herd due to higher sow slaughter and less gilt retention is cutting production capacity USA and Canada. We believe we are dropping 10,000 plus a week currently.
  • We expect a Spring – Summer 2010 Lean Hog Future rally in the coming weeks driven by hedge funds that are looking at low lean hog futures and the reality of herd liquidation.