The last six to nine months have brought many issues to the swine industry. It leads me to believe if you are not in survival mode you are either very lucky or have positioned yourself well in the past. Great people, families and tremendous business leaders have built this industry. Feeding the world is the most honorable of roles and the most noble of professions. Working through the issues that we have been and are going through, will be a test of survival for most producers.
Lean hog prices
Prices received for lean hogs have been in the red since September last year. Based on the Western Corn Belt, there has not been a weekly average price over $60 per hundredweight since August of 2019. WCB averaged 61% of cutout in the fourth quarter of 2019, 73% of cutout in the first quarter of 2020 and 48% of cutout in the second quarter of 2020.
In the last four months of 2019, the industry faced issues with packer capacity. We faced a disparity between available labor and the number of market-ready pigs. In the first quarter of 2020 the biggest driver of pig prices was the fact that we had more market-ready pigs than anticipated in the December report.
Finally, COVID-19 slowed packer capacity so much in this year's second quarter, that they were unable to harvest the number of pigs that were ready for market. We have anticipated Chinese pork demand helping our hog prices. Although we have achieved record pork exports to China in the last six months, it has had little noticeable impact on our live hog prices.
Tough times ahead
Based on futures prices for lean hogs today, we have negative margins for pork production through February or March of 2021. That will be 19 months of red ink, and some very difficult decisions will have to be made between now and then for many producers. The losses have been big, and working capital and owner equity have been tapped to get to this point. It is clear that we still have inventory backed up that will take some time to work through, if we can get them harvested.
Many producers will need to face financial challenges sooner, rather than later. Managing working capital and equity levels or ratios may require the sale of some assets. Have you identified under-performing or under-utilized assets within your farm?
- Update of budget and budget to actual performance.
- Understand the impacts to your borrowing base if using one.
- Understand the impacts to working capital (current ratio) and equity (equity:assets).
- Know your costs and manage capital spending.
- Build a team of trusted advisers and consultants.
- Communicate with your lender regularly.
Continuing to borrow more capital may not be the best move for your business. Some businesses will risk running out of available capital to fund operations. The most difficult decisions will be about downsizing if that is the best option for your business. Reducing the asset base can be an effective way of improving the financial picture while reducing the risk exposure.
Navigating difficult times is not something new to the swine industry. We are in one of those times with issues of packer capacity and rebuilding domestic demand and live pig prices. It takes strong leadership, strategic decisions and wisdom to foresee and forestall crisis. Developing those strategies and making those decisions will be challenging. One good way of brainstorming solutions and understanding potential challenges of those strategies is to utilize a broad team of trusted advisers.