Now that the industry has returned to profitability, producers’ moods have changed dramatically. The volume of communication I’m receiving is down almost 30 percent compared to last October. Producers and industry experts agree that we are now in for a period of good prices and an opportunity to repair some balance sheets.
However, it bothers me when I hear we’re in a cycle and now the cycle is profitability. That’s oversimplified.
I run about 30 miles a week, and on weekends I go for a long run of 10 miles. It’s a time when I can reflect on the past week and look ahead to the next one. Over the past two years, those long runs involved frustration and, at times, exasperation about the pork industry’s economic pain. The industry lost over $5 billion in equity over the past two years, and to say it was just a painful cycle falls short. On those long runs, I reflected on what are we learning to make sure this doesn’t happen again? I hope all of you are doing that as well. Here are a few points regarding what I think we’ve learned.
We needed to reduce supply to get higher prices. That’s not rocket science. Since October 2007, the North American industry has liquidated nearly 700,000 sows. But people need to understand that there is still a 6- to 7-month lag between when the sows are removed from production that their weaned pigs are still being finished — it takes longer then we realize. Looking at 2010, you should see fewer hog numbers this fall due to sows that were removed from production in late 2009.
The other point to remember is that we cannot increase our sow numbers. The last thing we need right now is more sows back in production. There’s also one less packing plant, and slaughter capacity will be an issue with any talk of expansion.
It’s hard for me to imagine that after losing almost $5 billion in equity that anyone would consider expanding. If that’s part of your plan, consider doing so through acquisition. For producers who’ve survived the last two years but don’t want to go through it again, now may be the best time to sell the business.
Margin management is important. If you look at the last two years, the average producer lost $20 to $25 per hog. Still, some producers lost less than $10 a head, some broke even and some were profitable. That could not have happened without managing margins.
What I mean is, No. 1, know your production cost. Then assess the markets and use futures, options and/or forward contracts to lock in a margin. In the past two years some of this was done to minimize losses; other times the markets allowed you to make some money.
Over the last 2.5 years, this effort has required a lot of work as we’ve seen more volatility than any time in history. I can’t tell you how many producers have said, “If we wouldn’t have managed our margins, we would not be here today.”
Exports are critical to our success. The U.S. pork industry is now the world leader in pork exports, but how much is too much? Our cost of production and our processing infrastructure have allowed us to continue to gain more market share. We export almost 20 percent of our annual production. If this would falter, prices would suffer dramatically.
The events of 2009, with Novel H1N1 influenza and what briefly happened with exports to Mexico, took pork prices down sharply last May. In 2008, U.S. pork exports to China grew dramatically due to its disease issues and the Summer Olympics, but that business also dropped dramatically in 2009. Both factors were big reasons for last year’s low pork prices.
Brett Stuart, an owner of Global Agritrends, analyzes the protein sector and exports. He points out that trade barriers preventing market access are the biggest obstacles for growing and sustaining exports. U.S. pork is very competitive from a pricing and food-safety stand point, but without market access, it means little.
Thank your staff. At a recent ceremony, a coworker who best represented our organization for his commitment to client service received an award. This person also has been fighting cancer. When accepting the award, instead of focusing on himself, he pointed to his team. He thanked them, acknowledging that he would not have been this successful without their support.
We can all learn from this person who is a true inspiration. Anyone who’s been involved in this industry over the last couple of years and has survived could not have done it without great people working for him or her. If you haven’t already thanked your staff, please make sure you do so. Great companies are created by great people.