Like the $3 billion national effort to rid the roads of inefficient, gas-guzzling vehicles, the sow buyout would, theoretically, encourage pork producers to cull breeding females that failed to cycle, recycle, produce or wean a decent-sized litter or are simply past their prime.
Although nearly everyone in the country seems to be in line for a handout these days, there is a practical problem facing pork producers — most of the “clunkers” in the U.S. sow herd were probably sent to town months ago.
That leaves producers (and their lenders) in a real dilemma. If there were such a program, would they grab the cash and accept the caveat that their hog barns would sit empty for a prescribed period of time?
Some would (and should), of course. But to my way of thinking, there has certainly been ample incentive (i.e. historic “per pig” losses) to get rid of non-productive sows, yet herd reductions have waned.
Equity Drain Mounts
Widely recognized agricultural economist Chris Hurt at Purdue University says a 10,000-head/year hog operation would have incurred $315,000 in losses over the last seven quarters, starting in Q4, 2007. For those who experienced the hog market crash of late 1998/early 1999, the same production system lost an estimated $213,000 in the seven quarters that followed Q1, 1998.
Making a bad situation even worse, Hurt says the 10,000 head/year unit likely faces another three quarters of losses, racking up another $81,000 of red ink.
In the two years that followed the '98 market crash, pork producers responded by reducing the breeding herd by about 10%. In the nearly two years of losses tallied during the current economic crisis, producers have responded with a mere 3% reduction in the sow herd.
Why is this cycle so different? Hurt and others list several reasons for the reluctance to cull deeper.
First, in this go-around, the lion's share of losses was triggered by high feed prices. That wasn't the case in 1998-etc., so many were hoping feed prices would moderate to more traditional levels. When the hog market climbed above $60 in August of last year, $5 corn looked manageable, so producers' culling practices backed off.
Next, the pork export surge in the summer of 2008 had two primary drivers: China, where domestic production was curtailed by disease, plus they were gearing up for the Summer Olympics, and the U.S. dollar's global value weakened.
“Looking back, that export surge was a one-time, unique event, as exports have returned to much lower levels,” Hurt notes.
In addition, bigger, newer pork production systems are slower to respond to market signals.
Finally, from mid-2000 to Q4, 2007, profits and net worth accumulation were substantial.
Hurt estimates that by Q3, 2007, the average pork producer had healed handsomely from the losses of the previous downturn. For many, their net worth made them feel fairly secure, so they braced to weather the economic storm.
Many pork producers have made adjustments that seemed infeasible just a few years ago. We've learned a great deal more about swine nutrition, alternative feedstuffs and new feeding technologies. Greater scrutiny of herd health practices, genetics, workforce performance and housing alternatives have sliced and diced our way to greater efficiency. Those who remain are leaner, meaner, better risk managers than they were two years ago.
One tactic that has not gained acceptance is a proposed packer initiative to remove incentives for heavy carcasses — at least in the short run. The suggestion is offered by Iowa State Agricultural Economist John Lawrence, who admits the move carries a double burden on packers because it would mean a temporary surge in slaughter numbers and some pork would have to be stored longer. Still, it would be good “for the long-run sustainability of the industry,” he says.
“More pounds produced at a loss do not reduce total cost,” Lawrence reminds. And, fewer, lighter pigs would ease stocking demands and might even serve as an impetus to retire less efficient grow-finish buildings.
If our representatives in Washington are reluctant to launch into another buyout, perhaps they could see fit to support a USDA program to purchase as much pork as possible for school lunch and other food aid programs, focusing on products manufactured from cull sows.
A focus on reopening foreign markets closed under the guise of H1N1 flu concerns would be greatly appreciated, too. While they're at it, it would be a great help if the federal government would intensify an effort to quell the H1N1 virus' association with pigs and pork.