As the end of 2015 approaches, it’s safe to say most pork producers are hopeful that the coming year doesn’t end up like what is currently projected. For the past month, it feels like all news has been negative when it comes to future and cash hog markets. The nearby cash hog prices have dropped from near $70 per hundredweight to $50 per hundredweight in what feels like a heartbeat.
At the same time we’ve seen December and February futures drop by greater than 20%. We’re approaching price levels rivaling the unhappy times of 2009.
The real question becomes, have we found the bottom and what are the real reasons for the huge correction? To me it feels like the market is oversold. The scary thing is the normal seasonal tendency is for projected margins to improve from Nov. 1 to Dec. 1. So far, we’ve seen the exact opposite. No doubt we’ve had larger numbers of pigs coming to market but no more than projected by the September hogs and pigs report, so what is going on?
Until we see a bit of positive news, the reality is there’s no reason for buyers of pork to bid up the market. Pork packers continue to have strong margins with cutout running around $74 per hundredweight and maintaining a $20 margin over cash. This is a really strong margin and gives plenty of incentive to keep pigs moving through the market and could help rally cash on a rebound. We know that certain cuts of meat tend to weaken into the end of the year, but the drop in cutout has been as dramatic as the drop in cash. It will be interesting to see why when all the dust settles.
Exports seemed to be holding together, although, we’re all hoping for additional export demand next year. Are the markets building in all the negative news plus more for possible retaliation from Mexico and Canada on country-of-origin labeling or just oversold at this point?
Strong balance sheets for future
In the meantime producers have to deal with the reality at hand and look to be as efficient as they can with costs and capital. If we’re in for a 12- to 24-month drubbing understanding your current costs and how much capital you can burn through before you run out of operating room will be important. I hate talking about burn rate, it’s been a couple years, but reality is we still operate in a cyclical business.
The good thing here is producer balance sheets are, for the most part, the strongest they’ve been in years. As I look at AgStar’s swine portfolio the advance rates on operating lines of credit are still under 20%, meaning producers are, on average, positioned well to weather the storm. Working capital will be of huge importance and you’ll want to have your debt structured such that you have access to the capital needed when the time comes.
Positioned during volatility
The one thing this volatility has reinforced for me is the ability of companies with a strong understanding of their cost structure and disciplined plan to make the market work for them. The windows of opportunity to lock-in profit for the next six months were short and targets had to be realistic but there are those who took them. The beauty of the position they now stand in is that they may now have the ability to adjust their position to take advantage of any potential rebound.
Volatility can bring additional reward even in a down turn. Some may have cursed the large volumes of cash that went to Chicago at the onset of porcine epidemic diarrhea virus, but in the case of those who remained disciplined they may have got that all back in 2015. The challenge going forward will be managing through the current markets and capturing any opportunities that might be presented by a rebound. If we can get one it will be welcomed by many.