After 20 years in the industry, pork producers still have the ability to surprise me.
Last month on this page, I doubted the fact that you had pulled fourth-quarter hog marketings ahead to the degree that it would matter. I was nervously anticipating what could happen in the last quarter of 2002.
I gambled in my approach to the editorial – writing it ahead of USDA’s September Hogs and Pigs Report – and the scenario unfolded another way. But that’s okay; I’ll take positive market news any day.
Still, my end conclusion remains intact – that communication and coordination within the pork chain is key to a profitable future. Equally important are packer capacity and the need to match market-hog supplies with that capacity. After all, it was the huge hog runs in August and September that maxed out packer capacity, and the anticipation of even more hogs, that sent prices spiraling lower.
In the next three to five years the only potential change in slaughter capacity is for it to decline. There are no plans to build or expand plants. So, packer capacity is a problem that will haunt you time and again.
For now, it’s clear that you took to heart the harsh lessons of 1998/1999. But more impressive is your response to the early warnings that market analysts and this publication starting sending as early as last spring. Not only did you pull enough hogs into the third quarter to keep fourth-quarter hog prices from tanking; you liquidated the breeding herd to limit long-term losses.
That shows astuteness and coordination that the production side of the industry has lacked in the past. Even with fourth-quarter 1998’s record low prices, producers’ slow response kept 1999 flowing in red ink. This year, the breeding herd dropped by 153,000 head from June 1 to Sept. 1. That puts it at 6.05 million head, the smallest level in modern production. And, there is speculation that liquidation is not yet finished.
Your quick response means profitability should return by spring of next year.
Certainly, rising feed prices were part of your motivation to get hog marketings inline for this year and next. Of course when feed prices are high, hog prices don’t have to drop as low to be unprofitable.
Another factor that shortened the response this time around is the increased use of market contracts. More pork producers have contracts in hand today than in 1998, and packers are securing a larger portion of their total slaughter needs in advance. That scheduling lets packers track supply more closely, which means they can send those signals through the pipeline more quickly.
It’s easy to focus on what you want to see in the September pig-crop report, but there are some elements that don’t add up. Among those is an abrupt shift in farrowings. USDA says farrowings in March were 2 percent higher than in 2001, April showed a 2.1 percent increase, while May jumped 2.5 percent. Yet, June farrowings were down 2.7 percent, July dropped 1.1 percent and August fell 0.7 percent.
“What was it in February 2002 that caused producers to curtail matings,” asks Ron Plain, University of Missouri ag economist.
It wasn’t until March that warnings about the fourth quarter started to surface. Even then, it’s unlikely that significant numbers of producers heeded the warnings immediately.
The September report also added 96,000 head to the January and February pig crops. That’s far short of the nearly 500,000 extra hogs marketed in August and September. Canadian hog and pig imports can explain some of that difference, notes Plain, and some is due to the aforementioned early marketings. But there seems to be a lot of wiggle room left.
“I certainly hope USDA’s September inventory numbers are right, but I would point out that most of the recent revisions have been to add to the inventory,” notes Plain.
That means you still need to watch hog slaughter and other market signals to confirm USDA’s numbers.
But for now, I want to compliment you on a job well done.