You know the saying, “Another day; another dollar.” Well, the same can apply to another new year.
So, ready or not, here we are: a new year, a fresh start, another set of opportunities and challenges — and some old ones, too.
All in all, 2011 was a decent year for pork producers. Unfortunately we can’t say the same thing for our fellow Americans, or globally for that matter. In the United States, record unemployment, continued home foreclosures, a roller coaster stock market, budget and debt turmoil, and a do-nothing Congress all add up to cast some pretty dark clouds. The holidays have provided a distraction, a break in the gloom, but we could see consumers pull back hard in the early stages of 2012.
Pork producers, on the other hand, saw a rally in pork exports, which pushed sales to a new record and drove margins into profitability. Domestic pork demand held up well, and pork producers scored some victories in Washington (specifically involving the Environmental Protection Agency and the proposed GIPSA rule). Sure, record corn prices forced feed prices to record highs, but hog prices also set a record. With risk-management plans in place, profits of $5, $10 or $20 per hog were there for the taking. And many have extended those opportunities into the year ahead.
The pork industry’s optimism is spilling over into 2012, and while that’s a good thing, it’s also worthy of caution. So, even though you may not be a resolution maker, here are some things to consider for the year ahead.
Don’t expand. Okay, that may be a bit foolhardy, because with profits in your pocket, expanding global markets and declining meat supplies, there’s a temptation to grow.
At least tread cautiously. A significant reason you’re facing a profitable outlook is that 2011 exports were hot, especially to China, South Korea, even Russia and earthquake-ridden Japan. China is the most fickle buyer of the bunch and can be counted on the least for consistency. The South Korean market will grow over the long term, thanks to Congress finally approving the free-trade agreement (which is set to start in February). But U.S. pork’s gains in that market for 2011 were driven by Korea’s foot-and-mouth disease break. Other countries were good pork buyers as well, but keep in mind the global economic woes will be slow to recover and may spread further.
U.S. pork has made steady gains in the export market over the past couple of decades, and you will likely continue that trend. Exports do offer the best future growth for your product. But each record makes the next climb harder. The dollar’s value, political whims, economic uncertainty and rising prices all challenge export sales and 2012 doesn’t come with a guarantee.
Productivity is the priority. Along with attentive risk management, improving productivity offers the greatest profit potential. Obviously, high productivity helps dilute high input costs. Pork producers have become masters of productivity. For example, the year-over-year gains in average pigs per litter have increased 2 percent for the last 17 quarters. (Fourth-quarter 2011 results weren’t yet in at the time I wrote this.) The previous annual rate was 0.5 percent.
Hogs today grow faster and reach heavier market weights on less feed than ever before. Many producers are closing in on 30 pigs per sow per year; some are close to 35. So, even without adding sows, this year’s hog slaughter will likely exceed 2011 levels, some say by 2 percent.
Corn prices might begin to stabilize, as ethanol mandates enter a more moderate phase. But corn prices aren’t likely headed to $4; you’ll need to compete for $6+ corn. That means production management, efficiency and innovation are priorities, and the first avenue for growth. Along with that task is maintaining herd health protocols to keep those pigs growing.
Keep an eye on domestic demand. Export gains may be exciting, but the vast majority of your product remains at home. Domestic meat consumption has been declining since 2007. According to USDA’s forecast, U.S. consumers will eat 12.2 percent less meat and poultry in 2012 than they did in 2007. Some of that decline is due to rising meat exports pulling more meat out of the domestic market, but U.S. consumers do seem to be tempering their taste for meat.
Rising meat prices and economic pressures are part of that picture. You needed retail prices to catch up with your rising production costs, and they’re getting closer, but consumers may drop fewer packages or certainly different cuts into their shopping carts. In your favor, competing supplies — beef and chicken — will be down this year. While chicken can turn on a dime, those producers don’t have many dimes to spare. As for beef, it will simply take years to recover from drought-induced culling.
Baby Boomers are entering ages where they will eat less of everything, especially meat. There are social trends motivating others to limit meat consumption. I’m not talking about vegetarianism. These are perceived social issues tied to meat like environmental impact, animal welfare and antibiotics. Once someone gets used to eating less meat, it’s an easy pattern to maintain.
Naturally, you have to pencil out and do what’s best for your business. That may mean growing production. The point is, just as you calculate down to the penny when it comes to productivity and costs, consider the broad view and the what-ifs that you don’t control. Pork’s positive trends of 2011 may continue into 2012, but be prepared if they don’t.
So, here we go again — another year; another dollar — and hopefully more.