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Maintaining Markets in Uncharted Times

April 16, 2014

7 Min Read
Maintaining Markets in Uncharted Times

When I was asked to write this article, I was a little stumped on where to start with my thoughts. We are in an unprecedented time in the swine industry. I am writing this on March 13, and cutout values recently hit $120, which I believe is an all-time record. We have the porcine epidemic diarrhea virus (PEDV) that is raising havoc across the industry. These recent events mean, from an economic perspective, producers will make more money, on average in 2014, with lower production.

We have producers who have practiced margin management over the past years who are now funding margin calls at a record pace. Table 1 below shows our portfolio at AgStar; you can see increased volume compared to a year ago. This chart shows that we are up $500MM, and our best guess is that a majority is sitting in Chicago today.

My challenge to you is to think long-term about the pork industry and what we need to do to earn market share. We have grown our exports to more than 25% of our production in the U.S. We are the world leader and have the potential to grow this even more, with an increased appetite for protein with global consumers. In addition, in the U.S. we have made inroads with the restaurant space for pork on the menu.

But if you look at overall pork consumption per capita, we have been relatively flat. Without the growth in exports, we’d be in a tough spot. So I continue to focus on what the pork industry must do long-term to earn market share in the protein space.

In my opinion, the priorities include:

Continuing to have no foreign animal disease that would jeopardize our markets. The recent PEDV outbreak has resulted in thinking about what we would do if we had a foot-and-mouth disease (FMD) outbreak or something like African swine fever break in the U.S. This would be further compounded if the break occurred in a hog-dense area such as northwest Iowa.

So, as an industry, we must continue to be vigilant on blocking any type of foreign animal disease from entering our current system. Our level of biosecurity is very good, but complacency is non-negotiable here.

The other consideration is premise identification and the willingness to share information on locations and movement of livestock. The need for transparency and information sharing is critical. I know the National Pork Producers Council (NPPC) board has an emergency plan should a foreign animal disease break occur, but having everyone on the same page on this contingency plan is crucial. Preplanning is essential to maintain our market share. While I believe we are ahead of others, we still have room for improvement in this area.

This is an area that I am asking you to think about. I believe as we go forward we will have opportunities, but not all pigs can potentially fit all of the markets. In the U.S., for example, you have ranges from white-tablecloth restaurants to fast food, and meals prepared at home. An interesting fact is that a ham sandwich is the second-most popular sandwich eaten at home in the U.S. Did you know that? Here is a link for proof: www.prnewswire.com/news-releases/its-not-your-mothers-ham--cheese-54962567.html

The question I have for everyone (producer or processor) is, how can we capture greater market share in our largest market today? We “own” breakfast today — with bacon, ham and sausage — but can we, through a series of coordinated efforts, develop and promote products that help grow our market share in other areas? We have made progress on gaining some market share in white-tablecloth restaurants. Some of this success is due to the price point of beef in comparison to pork, but we’re still not consistent when it comes to the dining experience. The National Pork Board has done a good job of helping with this education, and it’s getting better, but we can still increase our market share. This also needs some coordination from the producer and processor end as well, as we may have some more niche markets to help fill the market potential that exists in this marketplace.

Capital available

Having been a lender to the industry for many years, I believe that it will continue to be important to have capital available for producers going forward. You can’t grow your market share if you don’t have access to capital to grow your business. Table1shows how much money we have needed to fund through the level of volatility that we have experienced recently.

In 2009 (that was a tumultuous time, as many remember) we had meetings with lenders to discuss the plight of the industry. It takes lenders that want to understand the industry, as well as the willingness to stay during good times and bad, in order for the industry to continue to grow and prosper.

Continuing to attract people is also vital. We have many producers in their 50s, and we’re fortunate to be seeing some young people come back to work in the swine industry. Today, we have great leaders of pork companies who have family members or emerging leaders that are taking over the leadership of the operation. We are in the early stages of many of these transitions, and the succession of the intellectual property of the current leaders must continue.

So, while the future is bright, there is a tremendous amount of work that must be done yet. Moreover, we must continue to attract people who want to be involved in the pork industry. Production labor is a critical area of concern, as we need a pipeline of people that want to be involved in the swine industry. After all, you can’t grow an industry if the foundation is not strong.

We know that 35% of the U.S. pork industry is vertically integrated, and more than 90% of the industry is aligned through some form of marketing agreement. We are getting fewer pigs on a daily basis that are being sold on the open market.

If we are going to gain market share, we need to have a system that has viability. I understand that processors want to buy pigs and make a profit, and producers want to sell their pigs and make a profit. However, the important part for us to consider is that we need both the live and the processing side to be successful. I have been concerned of late that we are placing more demands on the producer (whether it be animal care requirements, antibiotics, etc.), but how will producers be compensated for these additional demands — or will it just be required?

The unease I have is for the independent producer with 2,000 sows, who is being asked to make changes with regards to how he or she should raise livestock. I have no issue with the request at all, and I believe everybody should have a choice to decide what they want from the supply chain. I, however, want to make sure there is an acceptable return for producers to make the change. I don’t have the answers, but I do have concerns for our independent producers as we look to the future.

I recently had dinner with a producer who is extremely involved in the pork industry; he’s been involved on some of the national and state pork industry leadership boards. I thanked him for all that he’s done in support of the industry, and explained that others needed to get involved like him. He shared with me that his involvement in the industry was “personal.” What an amazing answer! We all need to make this “personal” to ensure that we grow our market share and have long-term success.

This is a way of life — a great way of life — that you’ve chosen to be part of. It’s also a business that is extremely critical to the world’s food supply. As a producer, you need to be an advocate for what you do, and how you do it, and take pride in the fact that you are the best in the world at what you do. You need to not only be engaged on the farm, but also in your local community — with social media, elected officials and in many other ways. You have a lot at stake, but telling your “personal” story of what you do and why you do it will be more important than ever if we want to continue to grow our market share. I’ve been very fortunate to work in this industry my entire life; we all must do more in all areas going forward if we are going to continue to work together to help the pork industry to grow and prosper.     



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