Pork Commentary Jim Long President – CEO Genesus Inc.

June 24, 2013 ______________________________________

US Lean Hogs Continue to Increase

Last week (June 19), National Base Lean Hogs averaged $103.43 (52-53% Lean). Last year the same week averaged $98.45. The highest net last week was $114.50! In the last month lean hogs have gained $20 per head. The cheques have gotten bigger, they needed to. The huge crater of equity loss is now getting some pebbles to begin the backfill.

Some Observations

Last week we were talking to a feeder big broker. Ask how their business was? Got the answer “really challenged!” We asked why? Answer: “We have received more orders for pigs than we can find! We have been in the swine business a long time. We can never think of another year when at the end of June there was anything but small pigs trying to fine homes.” Barns chasing pigs in June is unprecedented.
A reflection of small pig supply and demand is reflected in the current relationship of the DTN Livestock Margin and USDA cash feeder pigs. The DTN calculation is that you can currently pay $25.75 for a 45 lb. pig to breakeven (corn $7.12 in calculation). Contrast the $25.75 to the USDA report that last week US 40 lb. cash feeder pigs averaged $49.00, almost double the calculated breakeven. Our observation is that feeder pig cash prices usually tracks real close to the DTN breakeven calculation. The current spread is probably the largest we have ever seen. It tells us that finishers are having to bid to get pigs indicating lower supply and solid demand. It also reflects in our opinion farmers that own corn with to feed it, just as farmers have a hard time not planting a field (even if insurance is smarter), farmer can’t stand empty barns (no matter how hard they try to stay disciplined). We have said repeatedly there were fewer hogs coming, the small pig story supports our contention. All pigs are finding barns. There are empty finishers with in a time period approaching (October hog marketings) where there usually is little barn space available. Fewer hogs mean stronger prices. We expect Oct-Dec lean hogs have upside to the current futures markets.

Smithfield tried to buy Maple Leaf

According to press releases last week in late March this year Smithfield Foods made an unsuccessful bid to acquire Maple Leaf Foods of Canada. Maple leaf is a major producer of hogs, packaged meats and bakery products. 2012 sales $4.86 billion. The bid was prior to Smithfield’s own sale to Shuanghui of China. Can’t say we are surprised that Maple Leaf rejected the bid. Maple Leaf is driven by Michael McCain with his brother Scott and family. The McCains own a substantial share of Maple Leaf and are the leaders in the company. They are very active and far from passive stockholders. They are a Canadian company with the iconic Maple Leaf & Schneider brands. They don’t need the money and we expect have pride of ownership. We believe they took Smithfield’s bid as a sign of real value in their company. You never sell if you are engaged, passionate, enjoy the journey, and have a vision and confidence of the future. The McCains are all in. Maple Leaf stays Canadian.

Ontario Pork Congress

Last week we attended the Ontario Pork Congress in Stratford, Ontario. Our observations:

Ontario has about 300,000 sows.
Mostly farrow to finish producers who grow their own feed.
Many have Dutch ancestry with strong livestock stockmanship ability. Business Model: Have pigs, grow corn, feed corn, put manure on land, do it again. The business model has worked well, especially since there are no droughts and excellent yields.
Probably the least consolidated area in North America with only two producers over 10,000 sows. This is independent country.
Ontario has surplus packing capacity with three plants. Quality, Fearmans & Conestoga. All ownership in strong hands. At the Ontario Pork Congress the battle to procure hogs from the Independent producers was quite evident. Collective shackle space is probably 30% surplus to supply currently.
We are not picking up any degree of expansion, the industry is holding. The way the industry has been the last five years, there is only muted optimism.
Like all Pork Exhibits, the Ontario Pork Congress is getting smaller. Fewer producers lead to the need of fewer suppliers. Genesus had a successful exhibit – we are the sponsor of the one and only Beer Tent. In marketing it’s wise to be where the producers are. Warm weather + Beer + hog producers = real busy.
Robert Hunsberger of Wallenstein Feeds in Ontario does a weekly report. This week with Ontario Market Hogs at $196.22/ckg. The projection is excellent producers are making $41.12 a hog, average $26.36 per hog. Feed costs farrow to finish around $130 per market hog.

Big Week

Last week was a big one for Genesus. In 72 hour time period Genesus shipped three 747’s of swine breeding stock. One to China. One to Japan. One to Russia. Many of you own your own business, you know the effort and sacrifice it takes day in day out in what is not an easy business. We all need wins. For Genesus last week was unprecedented not only for us but the genetic industry. No other genetic company that we are aware of has executed the logistics, red tape and supply to simultaneously send three huge jumbo jets to three different countries. To say I am proud of our team to execute this would be an understatement.

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