Understand potential advantage, negotiate in the open market

This game of competing forces (pitcher versus batter, what is my domain versus yours) is similar to the relationship between hog producer and packer.

Joseph Kerns

September 13, 2016

9 Min Read
Understand potential advantage, negotiate in the open market
<p>Pork producers and packers have a relationship of competing forces, similar to that of a baseball batter stepping to face a fire-balling pitcher &mdash; each looking for the advantage to advance their game, yet needing each other for a synergistic relationship of competing forces to manifest the profits of both sides.</p> National Hog Farmer

When “I don’t know” is on third base: What’s your game plan for the next six months?

Does anyone remember the famous Abbott and Costello comedy skit, “Who’s on first?” The two engage in a bewildering conversation about players on a baseball team. In the back-and-forth exchange, it’s apparent they aren’t having the same conversation. Right now, I have to ask myself, are we — the different segments of the pork production industry, having a similarly bewildering conversation in light of everything being pitched at us?

On Labor Day, the evening news broadcasted footage of Smithfield’s Illinois facility — a fire at the Monmouth plant. My heart sank as I thought about the damage to people and property. My next thought was the potential impact on the pork producers we serve. I am a sports lover, in part because strategy, execution and drive appeals to the competitor in me — and I suspect, you, too. The thought of “game plan” surfaced as I ruminated on not only the aftermath of the Monmouth situation but also how we play together as an industry in the midst of unprecedented volatility.

Run a few bases with me on this one. The title of this publication is National Hog Farmer. Not National Hog Processor. So from the dugout, I offer the perspective of our home team, 60,000-plus U.S. pork producers. We rely profoundly upon a group of other major players (packers, distributors, retailers, grain farmers, feed mills, veterinary services, animal health supply vendors and even bankers) who make the league successful. We are often co-dependent, leveraging each other for our collective good, and I generally appreciate the respect we have for one another’s efforts. In that vein, here we go.

When a batter is leaning over the plate trying to take away the outside portion from the pitcher, you may see a fastball coming in high and on the inside corner. Chin music. This is all part of the game and it is understood by both teams, the fans in the stands, the umpires and the announcers. You will not find reference to this practice in the Official Rules of Baseball — it is an unwritten, but fully understood “rule” of the game. Lean over the plate too much and you can expect a heater high and tight.

This game of competing forces (pitcher versus batter, what is my domain versus yours) is similar to the relationship between hog producer and packer. Just as you can’t have a game at Busch Stadium if the other team does not show up, our industry was built with the synergistic relationship of competing forces to manifest the profits of both sides. Each team wants to win, but understands that there will be resistance from the opposition and that those on the other side of the field are looking out for their best interests, just as you are looking out for yours. You, as a pork producer, are up to bat and are trying to scratch for any advantage you can get. The processing community has the ball in their hand, has a comfortable lead right now (margin between the cutout and cash markets) and is in a position to provide a brush-back pitch. Be aware.

In sports, the successful teams and individuals try to understand each other’s strengths and weaknesses as thoroughly as possible. Sometimes, you have to make in-game adjustments on the playing field (the defense is loading up the box against my elite running back, time to air it out a little) just as you do in business — the vet says we have PED. Snot. Time to mobilize the action plan. The most successful people we deal with in life and in business also understand their unique strength and leverage it to their advantage. Just as if you had a right-handed slugger in the lineup, your odds at Fenway Park with its short left field offer you an opportunity to excel. If he does nothing but pull the ball, you can expect a defensive shift to mitigate your advantage. We have to have the flexibility to hit the ball to all portions of the park so you can turn one over when the time is right. There is a delicate balance and dance to this on the playing field and in life. My point here: I think the fourth quarter will initiate a period of holding on, not prospering. If you can hunker down and get through what could be a rough six-month stretch, it is probably not a bad idea. Take what you get in this timeframe and do not try to swing for the fence.

I bring up these analogies and metaphors as the Monmouth fire caused a brief hiatus in the run schedule. Fortunately, no one was injured and the damage was not as severe as the ominous pictures on the news brought to mind. If there is “good news” in this situation, it is that it occurred in early September rather than December — we are not maxing out shackle space right now, I suspect we will be much tighter after Thanksgiving.

This is yet another warning to producers that having a plan in place before we hit the potential uncomfortable marketing environment later this year is just plain common sense. We need to understand that the fourth quarter of 2016 drifting into the first quarter of 2017 are not likely to be pretty times for the pork producer. Shackle space utilization will be tested and an unexpected breakdown, snow storm or other calamity will probably have a more significant ripple than the recent Monmouth situation. You, as a pork producer, are not holding a strong hand for the six months starting in October and running through next March — internalize this reality and mitigate your risk exposure the best you can. I suspect the game will shift beginning about April of next year. Pig numbers should seasonally decline, the two new plants will be preparing for operation and the fall of 2017 should look nothing like this coming winter.

Think of this April-forward period as having cleared your sure-handed-but-weak-batting shortstop and pitcher from the batting rotation and you are coming into the heart of your lineup. Big Papi is in the on-deck circle and the opposing team’s pitcher knows it.

Look for the opportunity to excel when the two new plants are rolling in 2017. You will have a product — pigs — that should finally be in short supply relative to packing capacity. The last time this happened was in 2014. That was a PED-induced pig shortage, this is packing capacity expansion. I am not trying to indicate margins will be as lofty as that golden era, but we will have an imbalance of supply versus demand that will favor the pork producer. Understand your potential advantage, negotiate in the open market, enjoy the game.

And now for the specifics …
Let’s get to the specifics. The corn market has recently tested the $3 area and was unable to penetrate this level. I suspect that will stand as a reasonable support area for the foreseeable future, regardless of what we see from the USDA in subsequent yield reports. At values below this level, the insurance provisions for a grain farmer kick in and provide essentially no incentive for sales. No farmer selling equals limited sales volume on the CME which likely limits downside movement.

Pork producers should be prepared to lock-in favorably priced corn if we approach this value. I suspect basis will remain wide west of the Mississippi River given the size of the crop and storage capacity constraints, the east should have basis values closer to historical norms.

Soybean meal still scares me. I am hoping for a production number that blows the doors off previous records (50-plus?) because we need it to satisfy the world demand for protein. We pushed soybean meal values for the entire year of 2017 down to about $305 last week. I would not let those values get away if we return to those levels. China will remain a buying force, the South American economies and current weather patterns have me on edge. If South America stumbles and the United States is called upon to supply more beans to the world, the price could easily spike. The input side of the equation is the good news in the market as we are trading toward the lower end of the ranges from the past few years. Perspective may be imperative on this one. Check the accompanying charts.

Accepting a moderate loss on pork production in the October-March period seems sane to me. If you are not running a forward-look model, it is time to push the math. Hoping for December hog futures to eclipse $60 may be a long wait. Be smart and nimble, have a hedge plan in place, buckle up and hunker down.

In closing
♦ Farm Progress Show was just in Boone, Iowa. We live just a few miles from the site so we had a parade of people through our home (sans Cheryl Day who was in town but did not stop by.) during the event. Make no mistake; the agronomic side is ahead of the livestock industry with the use of technology. I think if we pay attention to what is happening on the crop and land side, we can learn a few things of what they do right and not repeat any of their failures. Big Data is not going away. I say embrace and deploy it as appropriate. The show will be back in two years, let me know if you are in the area and we can have an interesting chat.

♦ Like baseball, pork production can be a methodical, deliberate process punctuated by a flurry of activity. That is OK; you just have to be ready when it all breaks loose. Make yourself the Cal Ripken of pork production. Steady, consistent, reliable, solid. Babe Ruth made a big splash and died at an early age. Manage your risk during the tough times so you have the ability and wherewithal to excel during the opportunity markets.

♦ Hey, there is one other unwritten rule of baseball that may be appropriate here. If you happen to plink the batter as he is standing too close to the plate, you can expect your pitcher or other player to get hit on his next turn at bat. The moral of the story: when you are trying to expand your domain and chin music turns into a batter that is hit by a pitch, there will be retribution later in the game. Packers will be at an advantage in the October-March window, the balance of power should shift back to the producer sometime in the second quarter of 2017. We need one another. Play nicely together.

Comments in this column are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals.

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