Pork Commentary By Jim Long President – CEO Genesus Inc. Looking to 2010 We all know the misery of the last 30 months. Unpredicted losses have evaporated $6 – $7 billion of equity out of the North American swine industry. The industry is not bankrupt because there are producers with cash. The reality is, if we valued our industry at today’s market price for inventory and swine barn values the industry has next to no equity. As of today, market hog prices of 59 cents lean are continuing to lose most if not all producers’ money. Over the last 30 months, over 500,000 sows have gone out of production in the United States and Canada. We believe no one cut production for any other reasons then they were running out of cash and/or courage. The financial and personal toll on producers has been devastating. Years of equity building has been eliminated. There has been little magic for financial salvation. Hog prices for too many months were below variable costs and this has lead to the hammering of the most aggressive organization. These are the companies that grew fast and borrowed money. Their curse was their ability to raise gobs of capital; this pushed their debt and cost of production higher than many. Now the combination of managing size and debt has hit some groups extremely hard. Consequently, they are cutting herd sizes. As one of their bankers’ called it ‘Managing production flow for cash flow maintenance’ or on our terms ‘trying not to go broke!’ The Future We see liquidation of the sow herds in the United States and Canada to have been significant enough to push lean hog prices above 70 cents lean in the early part of 2010. At this price level producers will stop losing money. We believe the combined United States – Canada sow herd liquidation in the last quarter of 2009 will be between 80 and 100,000. This will push the combined liquidation since September 2007 over 600,000. The total amount of market hogs available will continue to decline throughout 2010 as the production capacity declines. You have to look no further then Mexico to see the effects of lower hog supply. The average Mexican consumer has 20% of the buying power of an American consumer. Mexico’s hog industry was devastated by the H1N1 outbreak (swine flu). Despite the negative atmosphere, market hogs in Mexico are 21 pesos a kilogram (71 cents U.S. live weight per pound). Mexico had about one million sows in the summer of 2007. High feed prices (corn hit $9 per bushel), lower hog prices, lack of cash reserves has by all reports cut the Mexican swine herd by 350 – 400,000 sows. Abracadabra low hog supply = higher prices. Not only is the Mexican prices a perfect reflection of what hog prices can do with cut supply, but it is also creating a tremendous market for U.S. pork. A huge jump in U.S. pork exports to Mexico has helped pull the current market higher than many expected. It will continue in 2010. This is quite positive for prices in 2010. Mexico’s 100 million plus consumers will be a great opportunity for Mexico’s pork importers and America’s hog producers. (United States – Canada – Mexico total sow liquidation since the summer of 2007 is over one million sows). Other countries will help prices in 2010. Russia as long as we have market access has market hogs at $1.20 U.S. live weight per pound. China is about 75 cents U.S. live weight per pound. Japan will continue to take large volumes of high end cuts. At the same time, Brazil like North America has had devastating high financial losses.($50 per head). Brazil is North America’s major competitor in the Russian market. Lower supplies from Brazil and North America will cut total pork available for international trade. Both Brazil and North America will see higher prices by cut supply. On top of the high feed prices, domestic and global recessions, was the hysteria of H1N1 (swine flu) in 2009, the persistent fear mongering of swine flu by the media and Government officials. In our opinion, this cut demand and clearly was an excuse for restricting global pork trade. All factors were a detriment to pork demand and hurt prices. As we approach 2010, the Government is sitting on millions of doses of H1N1 vaccine. They are advertising trying to get people to be vaccinated. They are not coming; the pandemic is over. Give it 60 more days and some more girlfriends for Tiger Woods and it will become a distant memory. Suggestion: next time instead of Avian Flu, Mad Cow, Swine Flu, why not Tiger Flu? The Domestic and Global economy is slowly moving out of a recession. The correlation between meat protein consumption and per capita income is direct. Pork with approximately 46% of the world’s meat consumption will have a boost in demand from better economic times. Normal population growth while pork available for export declines will be price supportive. Historically, it has been hard times for swine producers. Fortunately, we are producing the most popular meat in the world, with almost double globally of chicken and beef consumption. We believe the decrease in hog supply and domestic and global economic and demand equations will deliver significantly higher hog prices in 2010. We see a scenario where 90 cents lean hogs can be achieved.
Categorised in: Pork Commentary
This post was written by Genesus