2011 in Review

2011 in Review

As we look back over the last 12 months, I think most pork producers would agree that 2011 turned out to be a very good year. As we’ve reviewed the information received from clients through October and projected what November and December earnings will be, our estimate is that most producers will average around $15/head profit for 2011. Even with higher feed prices, revenue for producers has been at an all-time high.

Pork producers have had a nice run of profits over the last two years. Here's our best guess on what we believe most producers' financial year end numbers will look like:

• Average owner equity should be close to 50%. This is a GAAP number – Generally Accepted Accounting Principles – that uses a factor of lower cost and/or market. I believe this is a conservative estimate.

• Average working capital per sow equivalent more than $700. This is a very important measurement. It is based on a farrow-to-finish operation. If, for example, you have 2,000 sows, you should have a minimum working capital amount of $1,400,000. Working capital means current assets less current liabilities.

Compared to a year ago, when we were still coming out of the very difficult years of 2008 and 2009, owner equity has improved an estimated 15%. At AgStar, we are very fortunate to work with an elite group of producers with owner equity over 60% and working capital per sow well over $1,000. The average 2011 earnings per head for this group will be over $20. This is not a function of size. It is about very good production, cost control and management of optimum margins. They are constantly working to improve every facet of their business.

We are currently working on a database that we hope to share sometime in 2012. This data, representing over 17% of the U.S. pork industry, will show average costs, profit per head, sale weight, etc. The dataset, although very generic, will provide a snapshot of what is happening in a portion of the pork industry.

More PRRS Breaks? – It's that time of year again when porcine reproductive and respiratory syndrome (PRRS) breaks are on the upswing. The weather in the Midwest has been perfect for spreading this virus. It will be interesting to see how effective the filters on gestation barns will be. I don’t believe PRRS is any worse than last year, but it always amazes me how much havoc this virus creates for pork producers during this time of year.

December Hogs & Pigs Report and a Look in 2012 – I don’t see any sizeable expansion coming in this report, but I do believe most numbers will be greater than 2011 – probably in the 0.5 to 1% range. I expect farrowing intentions to be similar to or slightly higher than year-ago numbers and I expect the "all hogs/pigs number to be slightly higher than a year ago. My best guess is that total U.S. pork supply will be 1-2% more than 2011. Most of this increase will reflect continued improvement of production efficiencies.

I expect profit margins for the next 12 months to be close to $15/head. From a financial perspective, my concern is that producers will want to expand production, which could push revenues lower in 2013. I am also a bit concerned about pork processing capacity. The U.S. pork industry is really in a sweet spot right now. If we increase numbers too much, we might not have adequate processing capacity. Some of these higher revenues are driven by exports. Let's not forget that this could change. Any slippage in exports could bring prices down.

Finally, and most importantly, I wish you and your families a blessed holiday season; 2011 has been a very good year for the pork sector and it looks 2012 like could be another good year. Please be sure to check out our weekly swine blog at www.agstar.com/swine.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com


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