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Pork Commentary: Swine Forecast Webinar 2010

by 5m Editor
1 December 2009, at 8:11am

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

A few days ago the 2nd annual Swine Forecast Webinar was held. We have pulled some thoughts on the future trends of the industry we believe were relevant.

Dr Tom Elan President Farm Econ LLC.

  1. From 1961 to 2007 Global per capita meat consumption grew from 52 pounds (23kg) to 94 pounds (43kg).
  2. 10 per cent increase in per capita spending = 8 per cent increase per capita meat production (obviously a growing world economy enhances meat consumption, getting the global economic recession over would be good for all of us).
  3. What drives the world's meat economy?
    1. How many people are there?
    2. How much money do they have to spend?
    3. How much are they willing to spend on meat?

Meat Production/Consumption

  • Global production growth is normal
  • 2009 may see a small decline
  • Per capita supply will certainly decline

US Total Meat Consumption

  • Peaked in 2007
  • Declined in 2008 and 2009
  • Forecast to decline again in 2010
  • First 3 year decline in history. (Editor's note. USDA projecting meat and pork per capita consumption decline in 2010. We cannot find their reasoning anywhere.)

Pig meat Production Growth 2010 versus 2009(projected)

NOTE: We are not sure about increase - our contacts in Brazil are saying liquidation.

Brazil +4 per cent
Canada -7 per cent
China +4 per cent
EU 27 -1 per cent
Japan -1 per cent
Mexico +2 per cent
Russia -2 per cent
USA -3 per cent

Global Pig Meat Export Overview

  • Pig meat exports will pick up in 2010
  • Demand in developing countries outgrows their production capacity
  • US and Brazil are especially expected to benefit from increases in export business.

Lee Fuchs Farm Credit Services FCS

Underwriting Guidelines Swine

  • Total Equity/Total assets >50 per cent
  • Current assets - Current liabilities >1.30
  • Cash flow >11.5 per cent
  • Loan/Appraised Value <65 per cent

Marketing Risk Mitigators

  • Marketing agreements
  • Hedging Policies
  • Quality Genetics (editor's note: very important)
  • Location of Finishing Operations
  • Management's Marketing Skill
  • Counter - Party Risk
  • Strong Liquidity Position

Production Risk Mitigation

  • Nutrition Programs
  • Specialized Management and Labor
  • Bio - Security and Herd Health
  • Quality Genetics (editor's note: there it is again)
  • Quality Facilities and Location
  • Pig Flow Methods
  • Strong Liquidity Position

Input Cost Risk Mitigations

  • Feed Purchase Agreements
  • Dedicated Feed Mills
  • Hedging Policies
  • Facility Location
  • Available Labor Force
  • Fixed Interest Rates
  • Strong Liquidity Position
Example of Current Financial Burn Rate (Cash)
20,000 Sows Farrow to Finish (US Dollars)
Cash operating Expense $.44 pound
Debt Service $.04 pound
Maintenance Capital Expenditures $.02 pound
Total Cash Uses $.50 pound
Cash Receipts $.40 pound
Burn Rate $.10 pound
Loss of $1,000,000/month.

Key Factors for Success

Good Liquidity

  • Financing from Creditors
  • Investing from Owners
  • Cash Flow from Operations

Mitigate Volatility

  • Contracts with Key Parties
  • Production Levels
  • Hedging
    Low cost Producer?
    Balance Sheet Leverage?

John Stadler - BMI Group

The Perfect Storm

  • Feed Costs (Corn Ethanol)
  • Economy (Domestic and Global)
  • Production Gains
  • H1N1 ( unfortunately called Swine Flu)
  • Pork Supply
  • Export Volumes (Market access due to H1N1)

Changing Packer Profile

Upstream Integration
More Concentrated
More Branding
More Value Added Products
Changing Roles (i.e. financing)

Accumulated Equity in Hog Production

Estimated of $7.5 billion in Accumulated Equity in the summer of 2007. Since then, an estimated accumulated equity has gone to a minus. (Editor's note: truly a shocking statistic and if correct we have an industry with little capacity to withstand many months.

Challenges for the Future

  • Risk Management - Equity Preservation
  • Marketing Hogs and Meat(different contracts)
  • New Meat Markets(exports, products)
  • Competition from other Meat sectors
  • Strategic Alliances - Relationships

Summary

All interesting perspectives. The bottom line you don't need to look hard to find how bad our business has been. We are of the opinion that Canada - USA - Brazil pork supply is declining. As major global pork export availability declines, prices will become more positive. We continue to believe decreased supply and enhanced demand domestically and globally will push summer lean hog futures beyond 80 cents lean.