Projected hog profitability fell into negative territory in November, and hog farmers are marching toward a challenging marketing year as the calendar pages turn to 2016.
One thing the extremely rough years have demanded over and over again is the strong will to survive. As Jim Lowe, D.V.M. in Integrated Food Animal Medicine Systems at the University of Illinois, said speaking at the Midwest Pork Conference, those producers who survived the historical disaster years of the past have two common attributes — exceptional solid balance sheets with capital depth and a deep understanding that efficiency is extremely important.
While 2016 looks like an unpleasant marketing year, it is not anticipated to be anywhere near the worst years already on the books. For the most part, the recent healthy financial years have many hog farmers sitting financially sound, which is good, since pleasing the banker is what really counts. The real name of the game is margin per pound by minimizing cost and maximizing revenue. “We keep score in dollars. We do not keep score in pigs per sow per year, feed conversion or PRRS [porcine reproductive and respiratory syndrome]-negative status. You do not get a gold star for not having a disease. You do not get a gold star for the highest PSY. No one [banker] cares,” Lowe said.
Nevertheless, it is a healthy business strategy to accurately gauge the current financial performance of the operation before calibrating a new plan. Each year can have its challenges, and you can diminish risk by exercising strategic thinking through gathering knowledge first, looking forward and always preparing to adjust.
Most seasoned hog farmers will probably say core business ideas and strategies stay the same each year, but outfoxing the “what ifs” can be an important step in a profitable year. Here are some business insights for this year to assist in formulating your individual company plan.
The No. 1 rule is do not panic going into the new calendar year, says Steve Meyer, vice president at Express Market Inc. Analytics. While the hog market has taken a bearish turn, he says the market is showing some resilience. In the short term, he recommends if you do not have hogs covered, then wait. He anticipates the market to show some response.
The unstable hog market has been a result of many fundamentals converging: the growth in competitive meats, larger pork supplies, correction in the pork belly prices and slightly sluggish demand.
As anticipated, the beef industry has made some progress in increasing the U.S. cattle herd. While growth takes longer for cattle, the corner has been turned, and more pounds of beef are coming to market over the next two years. As for the poultry market, broiler production does not seem to be backing down, with an increase in bird weight and a jump in the number of birds slaughtered, boosting the supply an estimated 4% from last year.
On the same pace, pork production is not missing a beat with an expected 7% increase compared to 2014, assisted by a relatively low mortality. However, the Livestock Marketing Information Center does not anticipate a significant supply growth in pork and broiler production for 2016, as seen in 2015.
The weight of large supplies of pork coming to market, the aftermath of the World Health Organization’s announcement linked to bacon, and the skyrocketing high prices of bacon may have all contributed to the hog price debacle last November, leading to the hog market bottoming out. Meyer says every time pork belly prices soar high, they crash, which started the debacle, since those prices account for half of the pork cutout value in general. He anticipates that the price of pork bellies will recover.
Still, demand will always be the wild card. It is important to acknowledge that pork demand is not growing at the same pace as 2013 and 2014. In addition, real per-capita expenditures have been close to year-ago levels, suggesting the bid surge is over for a while, Meyer explains. Although pork exports did see some improvement in October, pork demand remains sluggish in the leading value market — Japan. Still, overall 2015 U.S. pork exports reached 4.082 billion pounds at the end of October, just 0.45% lower than the previous year’s. Trade policy, the value of the U.S. dollar and stiff global meat competition all will be items to closely watch.
Focus on efficiency
Feed costs are low, and there is not much room for improvement. Meyer says the name of the game this year is maximizing efficiency. Keeping score in dollars means everything prior to the carcass is simply a cost center. Hence, maximizing efficiency means driving down expenses without hindering the overall performance of the pigs.
The first step should be accurately analyzing the farm’s current benchmarks before developing a strategic plan in minimizing expenses and pushing efficiency. Every cost center — feed, hogs, barns and labor — needs a 360-degree examination in order to make appropriate adjustment. Still, some adjustments may have hidden return on investments. For instance, the cost of a disease outbreak is one thing that cannot be truly quantified at the beginning of the year. Investing in pig health through a solid vaccination program, enhanced by a stout biosecurity plan, can yield more pounds of pork and eliminate the risk of costs skyrocketing by multiple disease outbreaks.
Step up biosecurity
The worst thing that can happen is a hog farm taking a hit on a disease outbreak, such as porcine epidemic diarrhea virus, at a time when it is mild enough that it has no market impact, Meyer says. In 2014, the market impact outweighed the cost of the disease outbreak. From a market strategy standpoint, it will be advantageous to take all measures to avoid a disease outbreak on the farm this winter.
Re-evaluating the farm’s biosecurity plan should be a normal routine. A complete assessment of the farm’s daily activities and management practices can reduce risk. A third-party assessment and frank veterinarian consultation is a good starting point. The level of biosecurity on farms varies. While it may not seem to be an urgent task, a comprehensive biosecurity plan could be the difference in making a profit or not.
Extra hogs in 2017, not 2016
Slaughter capacity in the fall of 2016 is going to be extremely tight, according to Meyer’s calculations. Obviously, the slow pork production in 2013-14 had packing plants readjusting. As a result, packing plant capacity is not in proportion to the pounds of pork currently in the production pipeline. Two additional plants in Coldwater, Mich., and Sioux City, Iowa, are not expected to be functioning until 2017.
In addition, the improved financial stability has some hog farmers wanting to expand despite the profit predictions for the year. Many producers made plans to grow and then stopped due to an outbreak of porcine epidemic diarrhea virus. Meyer says if PEDV remains at a low level, productivity is going to increase rapidly. Overall, a significant increase in pork production in 2016 could leave hog farmers scrambling for profitable marketing opportunities. Meyer strongly suggests, “If you do not know where the hogs are headed next fall, maybe you need to get that done.” Perhaps, the best option for pork producers is short-term agreements until the new plants are up and running. However, packers may not be as interested in those agreements, but Meyer says it will be easier to negotiate the deal now rather than in August.
Meyer concludes: “I’ve just been trying to tell people we do not really need extra pigs in the fall of 2016. It is in 2017 that we really need them to fill up the plants.”