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Ever-Increasing Costs of Production

Article-Ever-Increasing Costs of Production

Local corn markets in southern Minnesota are currently close to $3.89/bu. Corn in the Southeast is close to $4.80/bu.

The attached graphs outline what happens to cost of production as corn prices escalate from $2.00/bu. to $5.00/bu. The only variable that I changed was the cost of corn.

As you can see, for every $1.00 jump in corn costs, we increase our total cost of production by an estimated $10/head.

When corn costs $2.00/bu., the cost of production on a 270-lb. market hog is $112; when corn costs climb to $4.00/bu., the cost of product approaches $132/head, or a breakeven of nearly $49/live cwt. Looking at the markets so far this month, it appears this will be the second month in a row that we will see losses - following on the heals of 34 straight months of profits.

These higher corn prices will reveal the real differences between efficient and inefficient producers. For every 1/10th pound difference in feed efficiency, from wean to market, the cost difference is currently close to $2.35/head. Higher cost of production will separate the have's from the have not's and drive more consolidation in the industry.

Disease Issues and Death Loss -- After looking at many closeouts over the last 90 days, I've seen a large spike in mortalities across the Midwest. Most are caused by porcine circovirus-associated disease (PCVAD); it is wreaking havoc on many production systems throughout the Midwest.

A veterinarian told me this week that he has never seen health this bad in the country. I agree. I am seeing closeouts on many systems with 14-16% mortality - as an average! I also talked with a large cull-and-light-pig buyer who estimates his firm is buying 70,000 more lightweight pigs per month than a year ago. In the Midwest, today, I would estimate that death losses are up 4%, at least, which is one of the major reasons why slaughter levels are running where they are. I know that the PCVAD vaccines are promising, but there is still a limited supply available. I wonder how many hogs will be coming to market once the vaccines are more readily available. It will be interesting to see what develops.

Changes -- If you were in the swine industry on Oct. 1, 2006, you've seen the following:

  • Corn costs over $1.80/bu. higher and your costs increased $17-$20/head.

  • The Arizona ballot initiative to ban gestation stalls passed, then Smithfield Foods and Maple Leaf Foods announced they will phase out gestation stalls over a 10-year period.

  • Swift announced they hired J.P. Morgan to investigate selling their assets.

  • Smithfield Foods closes the second shift in the Sioux City, IA, plant.

  • Triumph Foods announced they have acquired land to build a second plant.
All I can say is WOW! We are probably seeing some of the most dynamic changes we have ever seen in our industry. I tell my clients to be aware of the changes, but also tell them to keep their eyes focused on the main goal - running their operations at maximum efficiency. If your production is better than the industry average, you will be a long-term player. If you are not, you will need to get more efficient, fast, or exit the industry. I know that is a blunt statement - but I believe it holds truer today than ever.

Click to view graphs.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at [email protected]