Taking a Look at 2015 Business Strategies

Hog prices have softened considerably in the past couple of weeks as slaughter numbers have increased. Following the roll-off of the October futures position, which went off the board in the $109 range, futures prices in particular have worked downward. The base price of cash hogs dropped to well below $100 and the cutout to near $105. 

Drivers of the fall

I think there are two main catalysts behind the fall in prices. The first is one of seasonality.  Pig numbers are increasing seasonally as we roll into fall. We spent many weeks this summer with weekly slaughter between 1.8 and 1.9 million head. During the last few weeks, slaughter numbers were between 2.0 million and 2.1 million and this week’s slaughter may push 2.2 million head. While the pigs available for slaughter have increased from this summer, we are still short of year-ago numbers, when slaughter was closer to 2.25 million head. For a couple of weeks in early November 2013, numbers were nearly 2.35 million head. Additionally, Saturday slaughter a year ago was about double what it has been running this year during early October.

The other reason for declining prices is significant reduction in cutout values.  Recent reductions in ham primal values in the marketplace have been a major contributor to the trend.  While it is much a factor of available ham supplies due to slaughter numbers, it would appear that there is some pushback to higher priced product in international markets (hams to Mexico in this case). It feels like there is good support at higher than historical levels, but that support might be closer to $100 for ham primal cutout value versus much higher levels than we have been experiencing under short supplies.

Outlook

If you’re like most swine producers, you’ve likely been working on a couple of issues related to the Outlook. With so many unknowns related to porcine epidemic diarrhea virus (PEDV), pork and pig prices, international markets and other issues, it appears that volatility will continue to be a management issue for all. At least for the coming year -- and may be the next couple of years -- grain and feed prices should be much less of an issue for livestock producers. With the current projected U.S. and world ending stocks for corn and soybeans, availability should be very good, and wild price swings in the rear-view mirror.

Year-End Planning

For many, this time of year is when you put together strategies for the coming year, which hopefully include budgets, forecasts and capital plans. Many producers are in a position to make additional investment in the business, however, that will vary from farm to farm.  I wanted to address some of those in a general way.

Expansion – After the year we have come through there will be expansion. Investing in new production is on many producers’ minds and many have the working capital and the management ability to take on additional production. It is always a fear that it will be over-done relative to packer capacity or ultimate demand for the product, but for some it is the right decision.

Investment – For many with additional capital, investing back into the business is the right choice. It may mean building a better infrastructure, modernizing existing assets, or adding assets that drive costs and/or risk out of the business are the right choice. Examples might be improving facilities, owning more of production assets being used, or improving feed milling capabilities. The idea should be to drive costs from the business and improve productivity. The investment should be evaluated on its return on dollars employed.

Building balance sheets – We know that there will still be a cycle in the business.  Based on what I see, the balance sheets of many are very strong. So, if we have to reduce production at some point in the future, producers need to be positioned to endure the situation.

Every operation will have their own way of prioritizing and executing these planning strategies. However you evaluate opportunities, the goal should be to strive to maintain a strong balance sheet with liquidity, improve production, costs and the value of the product prior to consideration of investing in additional production.

Kent has more than 30 years of experience in the swine industry and serves as the swine team leader for AgStar Financial Services. For more insights from Kent and the AgStar Swine Team, including their weekly video Hog Blog, visit AgStaredge.com.

 

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