Market declines call for long-term risk management

The live hog market has started 2015 in a free fall. Cash prices have fallen from $40 per head at the end of 2014, and wholesale cutout value has fallen $25 per head. Last week’s average prices for Iowa-southern Minnesota hogs were off $26.31 per hundredweight from a year ago, a 31% decline. U.S. Department of Agriculture pork cutout was off $21.15 per cwt., a 23% decline from a year ago.

Other meat markets have fared better. Choice beef cutout was up 14.3% and the price for Georgia Dock Broilers was up 9.4% over year-ago prices. The pork industry is suffering from issues that are not affecting other meat markets as severely.

The biggest of those issues was the West Coast port issue that came to an end Feb. 20 when a tentative agreement was reached. Pork producers are very dependent on exports with 22-25% of pork production being exported.  Approximately 50% of those exports leave the country from West Coast ports. With those ports severely impaired, the pork industry needed to find a new buyer for 10-12% of its production, which amounts to 50 million pounds of product. This pork is reportedly filling freezer space in the United States and being discounted to entice buyers. A much lower portion of poultry exports are loaded on the West Coast and beef is less dependent on exports, making these industries less vulnerable to the port issue. Even after labor issues are resolved and the ports are running at capacity, it will take time to clear the backlog and regain customers who found other suppliers from other countries.

The industry also experienced a sudden, and unexpected, number of hogs ready for market in recent weeks. The USDA’s December Hogs and Pigs report indicated that inventory of pigs 120 pounds and larger was down 0.5% from the year before. Those pigs should go to market from December to February. The first seven weeks of that period tracked closely with the report, but in the last four weeks, hog slaughter increased significantly, boosting year-over-year hog slaughter by 4-6% over the prior year. The port issues make the timing of these additional pigs especially problematic.

Production for the rest of 2015 is expected to be significantly higher than last year and very close to 2013 numbers. In general, clients have seen very good production numbers relative to recent years in terms of pigs weaned, wean-to-finish growth rates and survival rates.  Because of this, I believe production numbers reaching markets will be higher than anticipated. This should not be an issue once exports start moving again as beef supplies will still be short and expensive.

Overall, it will be another challenging year for margin management, but much the opposite from last year. Most people had, in their eyes, too much coverage a year ago and now have too little. Taking a longer view of risk management and staying the course with reasonable targets relative to historical margin opportunities makes sense. The pig industry has had unforeseen events impact the market every couple of years, more frequently in recent years. This affects margins and makes budgeting and long-term investments a challenge. For these reasons, I advise working on a long-term risk management strategy. This should include a written plan to execute effectively on a daily basis goal for the program and a periodic review of how your operation performed relative to the goals and what changes will make the strategy more effective.

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