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January 18, 2017
As we still are waiting for most operations to complete their financial results, I will do my best to compare 2017 to what happened in 2016.
Early in 2016, there was plenty of optimism looking forward to 2017. The new packing plants for Triumph/Seaboard and the Hatfield group are expected to become operational. It looks like both of those plants, along with Prime Pork, will be on target to process pigs in 2017. However, expansion and improved productivity have added just over 4% production compared to a year earlier.
Looking at the results for the end of the third quarter of 2016, the average producer in our database made $12.07 per pig. This is compared to the Iowa State model over the same period; showing producers made $3.70 per pig (if you were on the open market for feed and did not hedge your sale price). The difference is all hedge gains stem from management decisions. For the fourth quarter of 2016, there will be deterioration in the average earnings per head with substantial losses. Without knowing where we will settle in for all of 2016 earnings, my best guess would be in the $4-$6 per head profit. If you were on the open market during the fourth quarter selling cash hogs, the average producer lost $30 per head. Since there are so many variables between producers, it is difficult to speculate on the final numbers until we see them.
So what does 2017 look like?
When I am looking at 2017 the obvious first step I take is looking at what the current futures market is offering. Based on the futures markets, 2017 will look very similar to 2016. Producers will make most of their money during the summer markets and will give back some of the profits during the fourth quarter. Right now, I am estimating the average producer will make around $5 per pig for 2017. I know this is far below what most producers thought with the opening of three plants in the Midwest during the year. Hopefully, I will be wrong in my assessment as well.
What could change and move the profitability to a higher level for the year? I would start by looking at exports. During the first half of 2016, exports were down 1% year-over-year. However, a strong export market during the second half of the year pushes exports through November in volume up 7% year-over-year. Since May, we have seen a steady increase in exports. In November, pork exports totaled 225,757 metric tons, breaking the previous record 218,132 set in October 2012. If exports stay at the same pace they finished in 2016, I believe the markets could improve and potentially move the profit per head on an annualized basis to $10. The big unknown here is how will the Trump administration handle existing free trade agreements and if there are tariffs put on by the U.S. imports? Exports most likely will stagnate at best for 2017.
With a $5 per head profit projected for 2017, it looks like producers will lose approximately $30 per head in the fourth quarter again. If the new plants coming online are at full capacity during the fourth quarter, this could potentially push cash bids higher than expected. Do keep in mind that we still need to sell the pork. Currently, cutout has been supported by strong domestic demand and higher than expected exports sales. We are currently producing 4% more pork today, and the key is keeping demand strong when we add another 4% increase of pork during the next two years.
Vice President and Industry Specialist, Compeer Financial
Steve Malakowsky is a vice president and industry specialist for Compeer Financial. He started as an analyst in 1997 working with swine clients. Steve is rooted in the industry, serving as the Allied Industry representative as both a delegate and member of the nominating committee for the National Pork Producers Council. He presents nationally and internationally on topics regarding the U.S swine industry and is a regular contributing writer for national agriculture publications. Prior to joining our organization, Steve had 15 years' experience as a farrow-to-finish owner operator and helped with his family's dairy and crop farm. Steve earned his bachelor's degree in finance from Mankato State University.
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