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Can Pork Producers Handle Prosperity Without Expanding?

January 23, 2012

3 Min Read
Can Pork Producers Handle Prosperity Without Expanding?

I am asked this question by many people. The December 2011 USDA Hog and Pigs report did not show any real expansion. In our view, hog numbers will be about 1 to 1½% higher this year. Almost the entire increase will be accomplished through productivity gains, not through sow expansion. The concern I have is, in the past, when we’ve made money for a period of time, we have had a tendency to expand numbers. The industry has shown very good restraint in the past few months. It will be interesting to see if it continues. Higher feed prices and volatility in the global marketplace have probably helped curb thoughts of expansion. As balance sheets continue to improve, the urge to expand will increase. This trend will be worth watching in 2012.

Investing Profits
Every day, producers ask us where they should invest the money they’ve made. Many have balance sheets that would allow them to expand. The question I pose to them is this: “Where can you put capital to make your business more valuable?” Following are some alternatives to expanding the sow herd:

• Own your facilities. Many pork producers don’t own all of their facilities, opting instead to operate with contracting arrangements. We have several systems that are now trying to own more of the buildings (sow, nursery, finishing). In my opinion, this is a good place to invest capital.

• Improve existing assets. Many systems are adding farrowing crates, sow filtration systems, new feeders, etc. to make existing facilities more valuable and efficient. This, too, makes sense.

• Own or control farmland. Although I don’t believe paying $10,000 an acre for farmland is a good idea, some swine producers are looking at owning or controlling more land as a way to control feed costs. This growing trend can be accomplished through rental agreements as well as ownership.

Can Pork Producers Match 2011 Results? Last year was a very good year for the swine industry. To summarize 2011, I would estimate the average pork producer made more than $15/head, while the very good systems likely made more than $20/head. Balance sheets and working capital have improved and the mood across the industry is very positive.

Looking forward, the margins for the next 12 months would indicate that producers can make close to $20/head (Figure 1). The key to much of the industry’s success has been export demand. Pork exports in 2011 were at record levels. Only time will tell whether we will be able to maintain similar volumes in 2012 (Figure 2). As the lessons of 2008 taught us, export demand can change very quickly.

Future Financial Preview Columns
Going forward, the swine team at AgStar Financial Services, including Kent Bang, Steve Malakowsky and Justin Roelofs, will join me in taking turns in writing this column. We are very fortunate to work with a lot of great clients who have allowed us to acquire knowledge that we feel can benefit the swine industry. We also offer a weekly video “Hog Blog” at www.AgStar.com, which highlights and analyzes news and emerging trends in the swine industry. In addition, on Jan. 30, we will feature a webinar with Brett Stuart from Global AgriTrends. To register, go to: www1.gotomeeting.com/register/466227273. Space is limited.

Click to view graphs.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at [email protected]

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