Drought Damage is not Yet Done

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The drought has impacted the feed markets in several ways.  Feed prices rose with the summer temperatures and only started to break down with the harvest.  Feed availability has tightened with the shorter harvest, although new-crop feed supplies did reach the market earlier as the drought also accelerated crop maturity and harvest.  Half of Iowa’s corn and soybean crops were harvested before the calendar turned to October.  But just because the crop is in the bin and ready to feed, it does not mean that the drought is finished affecting your business.

For pork producers, you may be only a quarter through a year-long process of drought impacts.  As the accompanying graph shows, prospects for significantly high feed costs last through most of the next year.  Corn futures do not fall below the $7-per-bushel mark until next September.  Typically in a drought year, corn prices reach their peak before harvest, back off as harvest rolls in, and then rebound just short of peak value in the spring.  So far, this year’s corn market appears to be following that pattern.  Corn prices have retreated from the $8 range, but the retreat has been small.

Hog margins were weak entering the summer, and the drought-induced feed costs only exacerbated matters.  The higher feed costs have pushed more hogs onto the market over the last half of 2012, driving down pork prices.  With hog prices in the mid $70s per hundredweight and corn over $7 per bushel, margins are well below breakeven.  Hog futures show improvement in margins as we move into summer 2013, but equity in pork production will take another big hit between now and then. And this picture extends beyond our borders.

Recently I was asked to speak at a swine seminar in Shakespeare, Ontario, Canada.  It was a great seminar with wonderful people.  It reaffirmed my thoughts that the North American pork industry continues to evolve and improve. The dominant question at the seminar, however, was how to survive this latest blow to the cost structure.  While the crop sector has had a tremendous run over the last five years, the livestock sector has seen a significant loss of equity.  The sizable losses in 2008 and 2009 have not been fully filled in, and this year’s drought has likely brought losses of a similar scale.

The answer to the question is that there is no “silver bullet,” no magic remedy, to this challenge.  Pork producers must continue to do what they have already been doing:  improving efficiencies, retaining only premium animals and moving the rest quickly off the farm, as well as capturing better margins when available. In fact, arguably one of the issues with the hog market is that the sector is too efficient for its own good.  The quarterly litter rate has jumped from less than 9 pigs per litter in 2003 to over 10 pigs per litter in 2012.  Breeding herd cuts are offset by greater litter sizes.  Pork production has increased 16 percent over the past decade, and for the last five years it has maintained annual production that exceeded 22 billion pounds.

click image to zoomPORK Magazine - Business Matters In a certain sense, we are waiting for the demand side of the market to catch up to the supply side.  Pork demand continues to grow globally, but that growth has not been quick enough to maintain profitable prices.  Overall, U.S. meat demand continues to feel the strain of the last recession and the lack of job recovery.  In the short term, that will continue to be a problem. 

Longer term though, the picture should improve for the pork industry.  With growing populations and incomes throughout the world, protein and meat demand should continue to increase, which will translate into stronger hog and pork prices.  Also, droughts don’t last forever, so feed costs will eventually moderate.  USDA’s long-term price projections peg corn at $4.50 per bushel during the latter half of this decade. 

The question becomes “Do you have enough equity left to weather this latest storm?”


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