Jim Long, President-CEO Genesus Inc.
Sept 28, 2016
Road Trip to SpainLast week, we were in Spain. Spain has the third largest sow herd in the world with 2.374 million sows and 27.541 million in market inventory.
We spoke at the Annual Meeting of the Swine Cooperatives of Spain. As a group, they market around 6.3 million hogs per year. The meeting was excellent, with a special mention to Ramon Armengol for his gracious hosting. It was the first time I ever agreed with another economist speaker, as Erin Borror (U.S. Meat Export Federation) followed my talk with similar global views. Maybe the differences some agricultural economists have are a result of armchair cubicle vision. To get a world view, you need to get out like Erin does and see the industry in person, unlike some agricultural economists who get their world views watching the National Geographic channel.
Our Observations in Spain
An integrated production model with fixed assets primarily owned by farmer with integrators owning the livestock and providing the feed while taking the production risk. About 70% of Spanish production is integrated.
- Sow Farms – No farm can be built over 3500 sows. Most sow barns in 200 to 2500 range. Barns modern but without sophisticated equipment
- Labour: 1 worker/300 sows
- Construction cost – Farrow to wean, $1800 USD per sow
- Finishing Farm – Legal maximum, 7200 hogs
- 90% natural ventilation, ad lib feeders, low maintenance
- Labour – 1 worker/4000-5000 hogs
- Construction cost – $230 USD/hog
- $13 USD per weaned pig
- $4 USD nursery
- $14 USD market hog
- Producer pays labour, electricity, manure removal and dead costs.
- Labour cost – barn workers $13 USD per hour, most labour immigrants
The top ten integrators produce 35% of Spain’s market hogs. The Spanish production model is relatively efficient and does not take as much capital and assets as the integration systems where all aspects of production are owned by the integrators.
One thing we found interesting is the wholesale meat price of pork is similar to the U.S. About 80 cents USD lean a pound. The difference is US farmers are receiving 60 cents lean and Spanish producers 73 cents/lb. Whereas U.S. packers have a gross margin of over $40 per head, Spanish packers are more like $15 per head. Whereas Spanish producers are making money and are happy, U.S. producers are making nothing with the lean hog futures showing financial losses upcoming. Good to be packers in the U.S. where there are limited shackle spaces. In Spain, there is no pressure on packer capacity. A year from now, we expect US packer margins to be significantly less than today when the new US hog plants with 12 million capacity are coming on stream. Of note, Spain is expanding packer capacity by close to 5 million heads per year (10% packer increase).
Last week, the European swine inventory for the end of May was released (slow data). When you look at statistics, it’s no wonder Europe’s hog prices increased since May. The top 12 countries in Europe had decreased their inventory by 427,000 sows and 1,486,000 market hogs.
The massive decrease in sow numbers reflect the financial losses that were happening in the European swine market until May. Since then, the lower hog numbers reflected in this inventory and the expanded pork exports to mainly China has increased hog prices into the profitable area. The numbers clearly show that Spain has supplanted Germany as the number 1 producer in Europe. The Polish numbers are startling, as they saw a 16% decrease in sow inventory year over year to 797,000. It was only a few years ago when Poland had 2 million sows. Consolidation and low sow numbers will continue, it spears from the data that the Spanish Integrator Model is winning the day for market share. When we look at the lower swine numbers from Europe, they should help global market stability. We expect that the EU top 12 sow numbers declined further since May, as the negative momentum that losses were bringing wouldn’t have stopped liquidation suddenly.
Spain has grabbed word of the China export market. We visited three packing plants in Spain. All were focused on exports and China is on everyone’s mind, both as an opportunity and a risk. As Spain looks at Asian exporters, they are looking more at their pork quality. They recognize that markets are won and held by better products. That need for quality creates opportunities for Genesus as we are the global genetic leader in taste and flavor, combined with a competitive cost of production. It is gratifying to see the evolution of the market, the recognition that we are not producing pigs, but food. We need food that is nutritious, healthy, tasteful, and flavourful. A good eating experience is what creates real demand, and demand supports hog prices. As an industry, we need to think food, not pigs.
While in Spain, we also had opportunity to visit Genesus’ new nucleus and multiplier with the Catalana de Pinsos Company. Production has started with the first pigs on the ground.
A very interesting part of our trip was an opportunity for us to attend the Mercolleida meeting. Every Thursday, Spanish producers and packers meet in the city of Lleida to set the hog prices for Spain. What we heard was both the producers and packers put forward across a boardroom table the reasons they felt relevant to set the hog price. There was passion and there was reason. This past week, they agreed to hold the price steady. It is an industry dynamic for a collective meeting to set the hog price, which is far different than the North American way. You have to wonder what’s better, and what’s fairer. We believe the Spanish model is a reflection of the collaboration in their integrator model. Have to say, it was an interesting meeting.
This post was written by Genesus