Pork Producers Running out of Time

June 2, 2009 — 

There's no other way to say this: The end of the current pork industry is near.

The "14 days of spring" from April 24 to May 8 -- when news surrounding the A/H1N1 influenza pounded the hog and pork markets -- has undermined the markets outlook for the next 18 months and will cause significant losses for pork producers this year and next year and significant producer rationalization that will create a new, substantially more consolidated industry, according to Feedstuffs sources.

Already, 20,000 sows are in bankruptcy proceedings, and thousands more will be in liquidation come fall, sources said. "I sense that a large group of producers are near the end of their ropes," said Daniel Bluntzer at Frontier Risk Management in Robstown, Texas.

Certainly, the economic collapse and its impact on consumer demand for pork must also be factored in, but the economy is stabilizing and should start to recover later this year or soon into 2010, sources said. Certainly, corn and soybean meal prices remain strong but won't come near the record-high, runaway levels of last year, sources added.

It's the H1N1 influenza outbreak that has done the damage, they said.

Market rally has been lost

The H1N1 situation came just as markets were beginning a seasonal spring rally in which analysts expected pork producers, after losing money for 18 months and experiencing their second-greatest loss ever in 2008, would get high-enough prices to finally breakeven and even return to some profitability.

Markets seemed to settle down earlier this month as the number and rate of flu outbreaks slowed and as the pork sector seemed to be succeeding in getting out the message that hogs and pork are safe. Prices strengthened but then collapsed again. "We were 10 days into a 45-day rally, but now we're stuck," Bluntzer said.

"The time is past for our rally," added Erica Rosa at the Livestock Marketing Information Center in Denver, Colo.

Glenn Grimes, an agricultural economist at the University of Missouri in Columbia, said the effect of the first seven days of the 14 days is shown in his demand model.

He noted that January-March demand for hogs was down 2.3% and for pork was up 3.3% from January-March 2008, while January-April demand for hogs was down 3.1% and for pork was up 1.3%. Demand for hogs and pork soured considerably in just one month, he said. "The effect of the flu was quite dramatic . . . (and) it is not behind us."

Industry has lots of problems

The industry has lots of problems, sources said. Hog numbers are down in line with expectations, but weights are increasing and offsetting some of the benefits of the lower numbers.

Demand apparently is weakening as consumers are buying down the protein chain, which favors pork, but around in protein sectors for cheaper cuts, which hurts sales of the higher-value pork products.

Exports are supported by cheap pork products and the recently weakened U.S. dollar, but China and Russia are closed, and Mexico, the second-largest pork export market after Japan or the third-largest after China-Hong Kong, is just not buying at this time.

Furthermore, Rosa noted that it was at this time last year that China starting buying large quantities of U.S. pork to inventory pork supplies for the Olympics -- buying that won't happen this year. Accordingly, she said while pork exports in the first four months nearly equaled year ago, cumulative exports for the rest of the year may trail year ago.

However, Rosa said "the big story" is the extent to which packers are losing so much money that they don't have cash flows to pay higher prices for hogs. Packers' gross margins went below zero for the week ended May 23 for the first time in the history of the 30-year series that she works with, she reported, attributing this to extremely low prices for pork in the wholesale trade.

Big losses to continue

This gets into the biggest problem: producer survivability.

Given current prices in the low $40s/cwt. and breakevens in the low $50s/cwt., pork producers are losing $25 per head, according to agricultural economist Chris Hurt at Purdue University in West Lafayette, Ind.

Moreover, costs will exceed hog prices every month for the rest of this year and well into next year, he said.

Indeed, Dr. John Lawrence, an agricultural economist at Iowa State University in Ames, who maintains a hog production profitability series, projects losses of $18.60 per head this year after losses of $23.65 last year, which means that the second-greatest loss year ever in 2008 will be followed by the third-greatest loss year ever in 2009.

This points to an industry that will experience heavy losses for three consecutive years -- an outlook that could wipe out a lot of enterprises, analysts said. "The financial stress may be near the breaking point for many producers," Hurt warned.

Source:
Feedstuffs, June 2, 2009