Managing Volatility is Like Keeping Weight Off

March 28, 2011

3 Min Read
Managing Volatility is Like Keeping Weight Off

Twenty-six years ago, I weighed about 250 lb. I always joke that I had “sympathetic pregnancies” with my wife when she was pregnant with each of our two children. I’d start at 185 lb. and plump up to 250 lb.! It took me three years to lose over 70 lb. Of course, the older I get, the harder it is to keep the weight off. I told someone last week that I think my weight is like the corn market. I have to exercise like crazy for three days to lose a couple of pounds, and if I take a day off and go out for dinner, I can easily gain 5 lb. in a day.

Anybody involved in the swine industry and trying to manage margins can relate to this analogy. The amount of volatility is unprecedented and it is a challenge. It seems every day there are wide swings in all commodities that affect potential profits for pork producers – and that makes decision making difficult. In the past 30 days, the amount of margin calls that producers have had to send to their brokers would wear on anyone. Like trying to keep weight off, the main thing is to stick to a plan and execute.

When you consider the global influences on the market – earthquakes, tsunamis, the weather in South America and the United States, China’s impact, etc. – it is very hard to predict what will happen. Today’s successful production systems are disciplined with their margin concept approach. Every one of them will tell you it is very hard work and, at times, it is very frustrating – just like trying to keep my weight off.

Is Anybody Expanding? Calls have been coming into the office, asking whether we are seeing any expansion of the sow herd. My common response is there is very little interest in any expansion because the costs to raise hogs in the future are virtually unknown. When you look at breakeven costs for the next 12 months, you are approaching at least $170 for a 275-lb. hog. From what I have been told, the cost to construct a new sow unit will run close to $1,400/sow space. Lenders would require significant capital to do any form of sow expansion. Plus, we do not have any extra packer capacity to take on additional production at this time. All of these factors have tempered any measured expansion for the foreseeable future.

What are Producers Spending Their Money On? Producers have recovered from some of the severe losses of the last couple of years and some are in a financial position to make some capital purchases. I think you will see many producers looking at expenditures in the following areas this year:

New feeders – At current feed costs, a 0.10 lb. improvement in feed conversion equals over $3/head in savings. A new feeder can pay for itself pretty quickly.

More farrowing crates – The goal is to increase weaning age, not add more sows. The trend is to push weaning age to 20 days or later.

Filtering systems – We have been approached by several production systems that want to install air filters on their breeding-gestation barns. The technology looks promising. My only word of caution is to reinforce the importance of maintaining a high level of biosecurity regardless.

Controlling more of your system – We have more and more clients who want to own the full production system (sow facilities, finishing facilities) and control their inputs, particularly corn, by owning or renting cropland. This trend is for producers who do not intend to grow their system, but who want to own more of the complete system. It will be interesting to see if this trend continues.

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

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