I’ve been getting phone calls from the press and some East Coast investors who think that with higher hog prices we should be starting to see some sow expansion. But while we have record-high hog prices we also have record-high costs. As I write this, producers are receiving $185 to $190 a head for their hogs, and it’s estimated that producers are making about $15 to $20 per hog, depending on production costs. It’s nice to see some profits and producers’ continuing to recover from the latest very tough economic period.
When I look at the industry’s financial condition today, I would say the average owner equity has improved from below 30 percent at the end of 2009 to above 40 percent today. If 2011 feed and hog prices stay as they appear on the CME, producers could exceed 50 percent owner equity by year’s end. This compares to 2007, when producers were at 70 percent owner equity. So, by the end of 2011 they will have gained about two-thirds of the equity that most had lost from 2008 and 2009. A few production systems are back to where they were in 2007, but very few have interest in building new sow facilities and I’ll address the reasons why.
Feed Costs: The unknown of future feed costs has many people nervous about expanding. Currently, feed cost per pig marketed exceeds $100, and we’re still not sure if it could go higher. The great risk of higher production costs does not give people much optimism about building new units.
A common question is, what about the producer who raises his corn? My response is, he can sell that at $7 a bushel, make a nice profit and not have to worry about managing the hog market volatility. In fact, we’ve had producers in that scenario who have decided to quit owning hogs and just crop farm or become a contract grower.
Limited Processing Capacity: I urge all producers to look at the entire picture — not just their own operations. The U.S. pork industry does not have a lot of excess slaughter capacity for much sow expansion. Remember that Smithfield closed its Sioux City, Iowa, plant last spring. It would be a challenge to process many more hogs per day, especially in the fourth quarter, if any significant sow expansion occurred. Sow productivity is improving annually. Today, the norm in most systems is at least 24 pigs weaned per sow per year; a few years ago it was 20 pigs. The U.S. pork industry has made significant productivity gains, and we need to be cautious about any real expansion.
Cost to Build, Start and Finance: So, what would it cost to build a new 5,000-sow unit with gilt development on site? It’s close to $1,700 to $1,800 per sow space or $8.5 million to $9 million. Five years ago, it cost less than $1,400 per animal space or nearly 20 percent less. To get the sow unit started and the first weaned pig, it would now cost close to $500 a sow versus $300 five years ago.
Today, it would cost an extra $500 to $600 per sow or $1 million to $1.2 million more than a unit built a few years ago. The total cost for buildings and inventory for a 5,000-sow unit is close to $11 million.
From the lending side, highly leveraged transactions are not going to happen. It would require a significant amount of collateral or equity to get this project done. Producers are not in terrific shape, and with all the items previously noted, they are very cautious about building new sow units.
What Are They Spending Money on? Regarding capital improvements, this is what we’re hearing:
• New feeders: I can’t imagine how many new feeders are being placed. A 0.1-pound improvement in feed efficiency could be worth over $3 a head and a new feeder can quickly pay for itself.
• Sow unit filters to keep out porcine reproductive and respiratory syndrome virus: We’ve worked with several systems that put filters in sow units and have had them running for a couple of years. Now, they are filtering additional sow units.
• Owning more of their business: What I mean is, instead of growing more pigs, producers are looking to own more of their entire system. This might be a sow unit that was leased in the past, or building finishing barns instead of contract barns. Some clients are building more grain storage if they have a feed mill. Others are looking to build feed mills versus having toll mills. The main point is that producers want to control more of their system.
In the end, all producers are focusing on making decisions that emsure their businesses are more competitive and successful in the future.