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Costs Drop but Losses Continue

We have seen a dramatic drop in feed prices over the last 30 days. I’m commonly asked what breakeven costs are today and I typically give a two- part answer.

We have seen a dramatic drop in feed prices over the last 30 days. I’m commonly asked what breakeven costs are today and I typically give a two- part answer. For pigs that are being sold today, average costs are still $135-$140 a head. Revenue per head the past month has averaged $115-$120, meaning that the average producer is still losing $20-$25 per head. Costs to raise a pig going forward (with corn near $3 a bushel and soybean meal around $300 a ton) will average $125-$130 a head.

The concern for the pork industry is that when looking at future prices, there are no profits to be locked in until the second quarter of 2010. This would result in two full years without profits for the industry. This is forcing a fundamental change in the pork industry and also proving to be a very painful process.

Risk Management
I had the honor of leading a breakout session at the National Pork Industry Conference at the Lake of the Ozarks in Missouri this past month. Two producers, Bob Taubert from Minnesota and Rob Brenneman from Iowa, gave presentations on how they use risk management strategies to help improve their operations’ bottom line. I want to thank them both for their willingness to share their thoughts on how to approach risk management. Here are a few key takeaways from their presentations I thought I would share:

• Both operations have someone spending 20-30% of their day on risk management. This is something they both strongly believe that producers must do today.

• They work on a “crush” margin philosophy; if they see a profit they want, they lock it in (corn, soybean meal and hogs). The focus is on a margin and managing risk.

• Realize that you will not be perfect and don’t second guess yourself.

• Work with an advisor you trust.

• Believe facts and not rumors.

• Recognize that production risk is also part of risk management. You still must be focused on raising hogs in the best possible way to maximize margin.

Volatility and the Markets
I know many producers were trying to protect fourth quarter 2009 and first quarter of 2010 hog prices by using the futures market. Over the last week, futures markets have dropped significantly. The level of volatility we have seen in the markets over the past 18 months is unprecedented, which makes it difficult to establish any margin. I tell producers that volatility will continue and you must work harder than ever on risk management to survive.

Reduce Supply
I have spoken and written on this issue many times, and I will continue to stress this point in the future. The swine industry in the United States needs to reduce sow numbers by at least 300,000-500,000 sows in order for supply to mesh with demand. The industry will not improve until the industry contracts.

If the larger production systems do not follow Smithfield’s and Tyson’s lead on reducing sow numbers, the industry will continue to struggle. I have stated that we’re on the path of last person standing; as a result, it could take two years in order for this industry to recover. While this is the wrong path to go down, it seems this is the path the industry has chosen to take.

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