Time to assess hog business structure

Year-over-year changes in profitability can sometimes appear mind boggling. That is definitely true of the last two years. A year ago, the pork industry was coming out of a stressful 2013 caused by high production costs due to the drought. The industry went into 2014 stressed by porcine epidemic diarrhea virus, but was blessed with high profitability due to concerns over short supply. In April of 2014, cash hog prices had producers bringing in more than $250 per head. Now, nearly a year later, producers are receiving roughly half that with costs of production well in excess of cash revenue.

Swings in market prices are almost impossible to predict given the number of variables involved in affecting them. Still, the record profitability of 2014 will undoubtedly continue to fuel larger numbers coming to market during the next 12 months. One wonders if the current economic outlook will halt some sow expansion scheduled for 2015. There is enough balance sheet strength in the marketplace that some participants could continue to grow their business even in the face of losses. But how much appetite is there for that? At any rate, the hog cycle seems to continue to be a reality although the peaks and valleys seem extreme.

In looking at AgStar’s portfolio, there were many producers with some coverage on through August, but undoubtedly everyone wishes they had more coverage in place. With such a small amount of remaining protection in place, the industry is and will continue to see numbers in the red in the future. Unless something changes to improve markets, it will be important to maintain the liquidity needed to sustain possible losses. Most producers have the strongest balance sheet they’ve had in several years and interest rates are competitive. Because of this, producers should take this time to assess their business structure and finances. It’s a very good time to make a move to restructure debt to give operations more liquidity if it makes sense for an operation. Communication with stakeholders and lenders is always important, but especially so in volatile times.

It appears that a lot of producers are waiting for the market to rally enough to lock-in break evens for the fourth and first quarters. It will be interesting to watch how quickly producers respond if those kinds of margins emerge and they have the opportunity. Some got caught up in the frenzy of the rising markets last year and lost sight of a long-term approach to profitability. Unfortunately, the markets turned down nearly as quickly as they went up. Let’s hope the avian influenza currently moving through poultry facilities across the United States comes to a halt and we don’t have excess poultry product dumped on the domestic market as the lean hog futures currently seem to be pricing in. A written plan addressing the margins an operation wants to achieve along with a plan to measure how effective that program was is important to any operation’s long-term success in managing margins.

The industry’s quick response and ability to mitigate the challenge of PEDV is amazing. Because of this, most producers are currently in a good position to manage losses for a period of time. Going forward, the challenge presented by the strengthening dollar and weaker exports may be tough to work through which supports the need to continue to push for free trade agreements such as the Trans-Pacific Partnership. U.S. producers are still low cost producers and the best at what they do. Even though U.S. pork may not look as cheap as it once was, it’s still very competitive when compared to many markets with trade restrictions. 

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