I was recently with some of the top nutritionists in our industry — an impressive bunch. We spent a couple days in dialogue on myriad of topics that will impact producers and our decision-making metrics in the future. Here are a few observations.
We appear to be in an era of winners and losers, but this is not an instance of “the rich get richer” when it comes to animal performance. Stories (and we can corroborate some of them) of pigs per sow per year north of 32 pigs were often mentioned. These may be individual flows or whole systems, but the point is that our bar of elite performance continues to move higher. That by itself is not remarkable. What I took note of was the discrepancy between the good production and the bad.
We have all heard of the production problems with this tough strain of porcine reproductive and respiratory syndrome, and having flows of sub-20 pigs per sow per year were humbly mentioned, too. Herd health does not seem to have economies of scale. When it comes to buying power for amino acids or unit trains, the large producer enjoys a running head start relative to his smaller brethren.
This is not the same circumstance for health. I would contend that the smaller producers may do a better job in biosecurity and health management relative to bigger operations. The gig is the same when it comes to grow-finish performance. The smaller producers may not have the flexibility of larger systems, but their performance metrics were often more favorable. If this resonates with you, please understand your running head start and work to maintain/exploit your advantage, whatever that may be.
Are you ready for 209, 213?
There are more questions than answers. This was the third year for this event and the degree of concern was more prevalent than in past gatherings. Our continued use of effective antibiotics is under pressure for — at a minimum — reduction, and in some cases, elimination. The next-best alternative always seems to come at a cost in reduced efficacy or more expense or both.
Guidance 209 and 213 are on queue for January 2017 implementation. These deal with the use of antibiotics in animal feed. In case you are unfamiliar, the three documents can be found on the Food and Drug Administration’s site. Are you ready? This will add another layer of complexity to our decision making as we ponder the VFD requirements. Under consideration are where medicated feed will come from, documentation and paperwork/record retention considerations, and the winnowed spectrum of available solutions. This is an arena where larger producers seem to be a bit more organized and it is incumbent for all producers to develop a plan.
Relying on exports
Our reliance on pork exports to carry the proverbial water and evade border-closing diseases was another area of concern. The two new big plants coming online (the third facility in Mason City was recently rejected by the community and anti-agricultural activists; more on that later) are on queue for mid-2017. Unless we witness a pronounced jump in domestic pork consumption, we will rely on export volume to handle the increased production — you either sell it or smell it. Heaven help us if we were to encounter a situation where our borders are closed. The economic fallout would be difficult to sustain. This is another reason to work to keep yourself and our whole industry clean. In the past, if you came down with porcine epidemic diarrhea, it impacted your bottom line but did not necessarily negatively impact your neighbors’ prosperity. One break of foot and mouth disease taints the pool for all swimmers.
Adapt and deal
Capital deployment is inevitable. We normally think of this in terms of expansion, such as a new sow unit. This round (in my opinion) will also consist of updating systems (Food Safety Modernization Act, the above-mentioned Guidances) and the support infrastructure for production. The good news in all of this? Balance sheets are generally healthy and able to withstand the monetary outflow.
The bad news of all of this? A good chunk of these expenditures do not have a pronounced return on investment. Instead, they are largely maintaining the ability to operate in this changing era. This is likely just the current iteration of what will be more demands in the future. Whether the issue is pen gestation, changing antibiotic protocols, adjustments in stocking density or pig flow to accommodate the changes — we are going to adapt and deal … just like we always have. This is really nothing new, it just feels like it.
Soybean meal factor
The pronounced jump in soybean meal has caught several (raising my hand here) with less coverage than what we would like to have using the benefit of hindsight. The move from $270ish to $300 was not likely to trigger massive changes in the diet composition. Soybean meal at $340+/- does dictate a review and possible change in the finisher diet. Distiller’s dried grains with solubles have only moved slightly during the period that soybean meal has found a new life, and this is providing a formulation opportunity in the era of sub-70 cent lysine and good amino acid availability. This is important: you must evaluate your rations using replacement values, not your actual ownership numbers. If you own a bus load of $270 soybean meal, tell the computer the value is $340 and let the magic of least cost formulation work its stuff. You will likely extend the length of your ownership (if you thought you had three months of coverage, it may push out to four or more) which will serve you more favorably in the long-term. We must do this with all ingredients at all times, but in this case, the potential impact of soybean meal on formulation is more pronounced than normal.
One other thing with soybean meal: the CME spreads are not reflective of reality. I had a chat with representatives from the CME last week and shared my concern that wide basis values in the interior are not being reflected on the board. We as an end-user community need to be able to use the exchange traded commodities with confidence that the convergence of cash and futures happens within the parameters of predictability. We do not have that right now. Iowa basis values easily tradable in the mid-20s under the board should bring deliveries against the May board and, thus, weaken spreads. As of this writing, registrations stand at zero. We used to grouse about the Organization of the Petroleum Exporting Countries cartel, and this one feels quite similar with very few players dictating the rules to the consumer.
Dismiss 'farmer nice'
My last topic for this column is the recent rejection by the Mason City, Iowa, community of the proposed Prestage plant. By many counts, the ratio of those bearing proverbial pitchforks and making the most noise relative to those speaking in favor of the project was roughly 6:1 with the anti-plant crowd holding the numeric and vocal majority. Those producers affiliated with the Triumph plant may have a vested interest in remaining on the sidelines regarding this project, and the rest will likely suffer an economic consequence by their lack of participation.
No plant in Mason City will make it easier for the established entities to fill their capacity at cheaper levels — all else equal — relative to the presence to an additional bidder for hogs in the market. We in production agriculture may have — dare I say — a moral obligation to support progressive animal agricultural where we can. This one is a $250 million packing plant that was proposed by Prestage.
What happens when it is a 2,500-head finisher that you are trying to site to provide a family member an inroad to your operation? We owe it to one another to be champions for a common cause. We have ample evidence that those with an alternative opinion have demonstrated an ability to organize and coordinate an effort to oppose the industry that represents our livelihoods. It is probably time to stop the “farmer nice” attitude that a lot of us express, and become more vocal of what we stand for rather than remaining silent and allowing the herd that seems to stand against much of what we represent roll unopposed. Search “farmer nice” on the internet to see a video describing this phenomena.
So, is the common thread here that we are seeing the maturation of the swine industry? We all remember when survival was the order of the day — rapid expansion and crisis management. But today I get the sense that the pork industry is managing their operations the way any established industry would — addressing and mitigating risks, strengthening infrastructure, fine-tuning input decisions, developing 20-year business plans for sustainability, scalability and wealth transfer. More than ever before the business decisions we make in our home ponds, whether big or small, create ripples that move through the global supply chain.
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.