Certainly after the tumultuous ride of 2009, it would be nice to know what awaits you in the year ahead. It definitely would make risk-management strategies and long-term planning much easier tasks.
Of course, no one can know how a year, a month or a week will play out. When was the last time your day went exactly as planned? Yet, you forge ahead with the tools, the knowledge and the partners at hand. Fortunately, the pork industry is rich with those gifts.
The feed-grain structure and competition has changed with the influx of ethanol production, and the volatility it brought with it won’t be going away. Outside influences continue to chip away at your production methods, and regulations dictate your future and impact your bottomline. The export market can be the best and the worst of times; it’s great when it buys nearly 25 percent of your annual production and a harsh reality when those doors close.
The period of 2004 to 2007 was the most profitable in pork production’s history, and 2007 through 2009 was the most unprofitable. Both periods lasted longer than historic cycles — a possible foretelling of the future. The fixed assets of today’s pork operations make it much more difficult to scale back quickly.
“We’ve had people throw all the chips in to keep the hog operation running,” notes Mark Greenwood, vice president Agri Business Capital, AgStar Financial Services. “The people who are left want to be in pork production. The last thing they want to do is get out, and the last thing we want to do is force people out.”
There are two questions that industry participants need to ask:
What have we learned through this painful period?
How do we make sure that this does not happen again?
“I don’t accept the answer, ‘that’s just the way this thing works,’” Greenwood says. “Why would we all want to do the same thing again in anyone’s lifetime?”
He foresees a more aligned system to better coordinate signals, to share and mitigate risk across the producer, the lender and the packer. “At least that’s the conversation that the industry needs to have in 2010,” Greenwood says.
Here, seven industry leaders across a variety of disciplines have pulled out their crystal balls and share their outlook for 2010.
Challenging, but Better Days Ahead
“Hog prices will be better in 2010 than in 2009 — they have to be,” says Mark Greenwood, vice president Agri Business Capital, AgStar Financial Services. Of course, it’s the margin, not prices, that matter, and producers’ production costs will remain a challenge.
Breakevens for 2009 averaged close to $135 per head, while revenue averaged around $110; that translates to a $25-per-head loss. “I think this year’s cost of production will be similar — $130 to $135 per head,” he says.
Production numbers will be less. Slaughter for the year is expected to be around 109 million head, down about 3 percent to 4 percent from 2009. Producers have cut back versus closing shop. “If we have less supply and demand hangs in there, and the global economic recovery continues, hopefully we get to a little profitability. It’s not going to be a stellar year, but at least you won’t see tremendous losses,” Greenwood says. He looks for hog prices to improve after the first quarter.
As for the financial sector, things will not get easier and will probably get harder. “We have an industry that’s lost money for over two years, so lenders are going to be very cautious about putting more capital at risk,” Greenwood says. If you’re looking to switch lending institutions, this year is not the time.
Greenwood offers some steps to enhance the producer/lender business relationship this year; some may even become expected.
Provide timely, accurate accrual financial reporting: “The report might not be pretty, but if you can give your lender an accurate snapshot then he’s more confident that the producer understands his own situation,” Greenwood says.
Working with pork production systems of all sizes, he emphasizes that if you have 1,000 sows and finish 20,000 pigs a year, you’re running a $2 million business. “So treat it as such. Understand what your costs are and know where you’re at in any point in time,” he adds. After all, you are in competition for capital.
Timely means at least quarterly financial reports. “If your business is under stress, the more reporting you provide, the better it is, so then I’d say monthly reports,” Greenwood says.
Risk-management strategies: What are you doing to mitigate risk so you don’t lose money? Are you hedging any hogs or covering feed costs? Risk management is a three-legged stool. It involves addressing the volatility of feedstuffs and managing that input, managing revenue risk via futures or packer contracts, and also production risk. But the common thread in all those risk factors is the margin. “It’s not just about costs or prices, it’s about what you end up with,” Greenwood says, “and you have to look at it differently today.”
Some producers have managed through this last episode better than others, and a lot of that has to do with preventing losses.
Projections and analysis: “Many producers we work with now do weekly, 12-month breakevens to project what their profit prospects look like,” Greenwood says. “Some even do this on a bi-weekly basis. They evaluate how decisions and changes will affect their cash flow, balance sheet, operating line — those types of things.”
For 2010, the big issue for this industry is working capital — cash availability or line of operating capital. Needless to say, with this string of losses, liquidity has dried up. For some, the question is “What is your cash burn? How many dollars do you have left? And what are your options?
Since August, Greenwood has seen more producers downsize significantly so they don’t have as many pigs on feed, which helps their cash flow needs. He expects to see more contraction through March or April. “Then I think sow liquidation will somewhat stabilize and move back to more historical liquidation numbers,” he says.
The question is, will the production cuts hold or will they simply shift hands? “My best guess, from a capital perspective, is until we get any consistent level of profitability, it will be very difficult for that production to come back into play,” Greenwood says.
Policy Issues Won’t Dwindle
In addition to finding ways to return the U.S. pork industry to profitability, the National Pork Producers Council will have no shortage of issues to deal with in 2010. Audrey Adamson, vice president of domestic policy issues, NPPC, offers a look at the top five.
Child Nutrition Act: Congress must reauthorize this statute, which expires in March. Anti-meat groups are pushing to limit the amount of pork in the federal School Lunch and School Breakfast programs, which the act covers. There also may be attempts to include legislation prohibitions on some livestock production practices, such as the use of certain antibiotics and gestation-sow stalls, for producers who sell products to the federal government.
Food Safety and Food Safety Inspection Service Reform: Early this year, lawmakers are set to approve a food-safety measure that deals with the U.S. Food and Drug Administration. Next up may be reform of USDA’s Food Safety Inspection Service, which has jurisdiction over meat and poultry products. Among issues that have surfaced during FSIS reform are bans on antibiotics and certain uses of antibiotics, mandatory recall of contaminated food, a ban on fatigued pigs entering the food supply, expanded pathogen performance testing and standards, on-farm authority for FSIS and civil penalties for violations of food-safety laws.
Climate change: While U.S. House and Senate climate-change bills exempt agriculture from reducing greenhouse gases, the legislation includes perverse incentives for farmers to convert cropland into woodland, which would lead to higher feed-grain prices and a reduction in livestock production. NPPC, which opposes climate-change legislation, also will be dealing with U.S. Environmental Protection Agency proposals related to air and water, which could adversely affect pork operations.
Biofuels: Ethanol production, which rises and falls with crude-oil prices, will continue to be a major issue for the livestock industry in 2010. Certainly, corn prices will rise as ethanol production increases.
The federal ethanol blender’s tax credit and the tariff on imported ethanol expired by year’s end, and Congress likely will act to extend both. Additionally, EPA is expected to decide by mid-year whether to raise the blend rate for ethanol in gasoline to 15 percent from 10 percent. Such a hike will mean that the ethanol industry will use more corn, and undoubtedly higher feed-grain prices will result.
NPPC has asked for a study of the economic impact on the livestock industry of going to E15.
Trade: China will be NPPC’s top trade priority in 2010. As 2009 came to a close, the Asian nation began importing U.S. pork after more than a seven-month ban related to Novel H1N1 2009 influenza. But other trade issues with China remain, including the refusal to take pork from pigs that have been fed ractopamine, as well as that country’s massive subsidies for domestic pork producers.
NPPC also will continue to press Congress to approve pending free-trade agreements with Colombia, Panama and South Korea. Combined, these would add $12 to the price U.S. producers received for each hog marketed.
Slaughter Trend Down, Price Trend Up
By the end of 2009, the average U.S. pork producer had lost money for 25 of the last 27 months, for an industry total of $5.5 billion. That’s $750 million more than during the 1998/1999 financial disaster. This works out to an average loss of $75,000 for each of the 73,150 hog farms listed in the United States.
Producers have been losing money for three reasons, says Ron Plain, University of Missouri Extension agricultural economist.
“Thanks to the rapidly expanding ethanol industry, corn prices have been at or near record levels during the last three years,” he notes. From 1998 through 2006, the average farm price received for corn was $2.11 per bushel. For 2007 to 2009, that increased to $3.97 per bushel. Consequently, the breakeven price for farrow-to-finish operations averaged 54 cents per pound liveweight during the last two years.
“Unfortunately for producers, the record corn prices came during a period of record pork supplies,” Plain adds. In 2009, hog slaughter dropped by nearly 3 million head from 2008’s record 116 million, yet it still ranked the second highest ever.
The third factor contributing to the red ink was weak meat demand due to the worldwide recession. “U.S. pork exports in 2008 set a 17th consecutive record; in 2009, exports were down over 10 percent but still ranked No. 2. To make matters worse, the unfortunate naming of the H1N1 influenza virus cost U.S. producers about half-a-billion dollars,” Plain points out.
Although producers have responded to the red ink by cutting the sow herd, productivity increases have limited actual production declines. “For the 12 months ending with August 2009, sows farrowed were down 3.1 percent, but because of a 2.3 percent increase in pigs per litter, the pig crop was down only 0.9 percent,” Plain adds. He expects production per sow to continue to increase in 2010 but at a slower pace.
Complicating matters further, slaughter weights ran very heavy in 2009. Through November, barrow and gilt carcass weights were 1.4 percent heavier than for the same months in 2008.
As Plain points out, the U.S. swine breeding herd on Sept. 1, 2009, was 3.1 percent smaller than the year before and 5.4 percent smaller than two years earlier. USDA’s quarterly inventory survey showed that summer 2009 farrowings were down 3.5 percent, and fall and winter farrowings will each be down 3.1 percent compared to 12 months earlier.
“Because of a stronger Canadian dollar, the financial losses have been even worse for Canadian pork producers, and they’ve been cutting back faster than we have,” Plain says. The Canadian breeding herd on Oct. 1, 2009, was 4.5 percent smaller than a year earlier and 12.3 percent smaller than two years earlier. As a result, the number of live hogs coming south is steadily declining.
Plain’s hog slaughter estimates are presented below. His price projections are based on a slow recovery from the current financial recession. “If economic growth is robust, add $3 to $5 per hundredweight to the hog prices,” he says.
He pegs 2010 cost of production near $53 per hundredweight on a live basis. “I expect hog slaughter will decline again in 2011 and hog prices will rise further,” he concludes.
Production: A Mixed Bag in 2010
“One of the primary production challenges in 2010 will be feed-grain quality,” says Mike Brumm, president of Brumm Consultancy. Here are his production perspectives for 2010.
In the eastern Corn Belt, the 2009 corn crop is contaminated with varying levels of mycotoxins. Many producers are reporting vomitoxin levels of 3 to 5 parts per million or greater. “There are reports of ethanol plants turning away grain due to excessive contamination,” he adds. “Even with lower levels of contamination, the 3x concentration of mycotoxins that occurs in the DDGS production process makes this alternative feed-grain source problematic.”
For some mycotoxins, adding binding agents will reduce the contamination level and the associated production problems. For other mycotoxins, dilution with non-contaminated grain is the only solution. Either option will add to production costs, Brumm notes.
In the western Corn Belt, much of the corn crop was harvested at high moisture and dried, either on-farm or at a commercial site. “To increase through-put, temperatures may have been higher than optimal for grain quality,” Brumm says, “or the grain was removed from the dryer at higher moisture than desirable for long-term storage.” Much of the corn also had a test weight under 56 pounds per bushel. Add it up, and grain quality will be an on-going concern this year.
The nutrient content of dried distillers’ grains with solubles will evolve as ethanol plants work to recover more products from the grain beyond ethanol, DDGS and carbon dioxide. “Instead of being a commodity ingredient, DDGS will evolve to a source-specific ingredient, with between-plant variation increasing and within-plant variation decreasing for nutrient composition,” Brumm says.
Where to put the growing numbers of pigs coming from sow units remains a challenge. Today, the target is 30 weaned pigs per mated-female per year, versus the 18 to 20 just a decade ago. At the same time, post-weaning productivity is improving to unprecedented levels. “We now routinely expect wean/finish feed conversions to be under 2.5:1, and target daily gains at 1.7 pounds per day or greater,” Brumm points out. “With the swine genome sequencing in 2009, it is realistic to think about 2 pounds-per-day daily gain with wean-to-finish feed conversions of 2:1.”
So far, the animal-welfare debate regarding pork production has centered on gestation stalls and slaughter plants. Expect it to expand to include issues such as transporting pigs, castration without anesthetic and euthanasia methods, he predicts.
By the end of 2010, most producers will be PQA-Plus certified and audited, with many also enrolled in the We Care initiative. “While these are the first steps in responding to consumer concerns, it’s reasonable to expect more oversight and expectations of humane treatment in production systems from pork-product buyers,” Brumm says. He points to Wal-Mart, which has more than a 28 percent grocery market share. “If they become more aggressive in requiring welfare specifications from suppliers, expect this to have a major impact on every producer in the United States,” he adds.
Propane prices are tied to the world crude-oil price and can be expected to fluctuate. However, electricity also is a major energy input for production systems, and its cost is expected to increase 5 percent to 8 percent this year. Brumm sees more producers examining the economics of installing small wind turbines as a hedge against this rising expense.
The congressional debate on cap-and-trade legislation continues, and animal agriculture will be impacted. At the same time, the U.S. Environmental Protection Agency has begun the process of greenhouse-gas reporting from large animal-production sites. “Look for the reporting associated with a variety of environmental processes to increase and reach farther down the production chain,” he says.
Finally, Brumm expects an expanded discussion of how to eradicate porcine reproductive and respiratory syndrome from U.S. and Canadian herds. “Breed-to-wean sites and boar studs are making large investments in air filtration to keep the virus out,” he notes. “As more pigs are weaned with a PRRS-negative status, the compromise in post-weaning health status from area virus spread will be tolerated even less.”
Diversity Helps Keep Exports Moving
While U.S. pork exports have taken a step back from 2008’s record pace, it's important to keep 2009’s performance in perspective. In 2008, pork exports skyrocketed 57.2 percent in volume and 54.8 percent in value over 2007’s record levels, reaching 4.5 billion pounds valued at nearly $4.9 billion. That’s a tough act to follow.
With the global economic downturn, paired with China’s efforts to grow its swine herd and reduce imports, industry analysts had predicted a double-digit drop in pork exports for 2009. Then came Novel H1N1 2009-related restrictions in China and Russia (the No. 2 and No. 4 markets for U.S. pork last year, respectively).
While 2009 has been a tough year for U.S. agriculture, the numbers through October show that pork plus pork variety-meat exports have held up relatively well. They are down 11 percent in volume and 13 percent in value versus 2008. Those totals still exceed the 2007 pace by nearly 50 percent and essentially match pre-H1N1 projections. When compared to most products traded internationally, U.S. pork has fared pretty well.
“With total global trade declining by 21 percent in 2009, we are very encouraged by how well pork exports have performed this year,” says Phil Seng, U.S. Meat Export Federation president and chief executive officer. “We could still finish 2009 within 8 percent or 9 percent of last year’s total. With more consistent access to China and Russia, we may have even matched our 2008 totals.”
The H1N1 influenza-related market restrictions caused exports to China to plummet nearly 70 percent versus 2008. Exports to Russia dipped more than 40 percent, as the country closed its doors to pork from many U.S. states for several weeks.
“We have already seen exports to Russia recover significantly, despite some ongoing market-access issues,” Seng notes. “If meaningful access to China is restored, it will provide positive momentum for 2010. We don’t expect a full return of the phenomenal demand of 2008, but China can still be significant to U.S. pork's success.”
Seng also expects continued strong performance from Japan, which is perennially the leading value market for U.S. pork. Through October, exports to Japan reached nearly $1.3 billion — a 1 percent increase over 2008’s record.
“There’s still room for further growth in Japan,” he says. “This year we saw Japan’s domestic production increase more than 5 percent, something we don’t expect to be repeated in 2010, and yet it did not hinder our growth. There are new opportunities in Japan we can take advantage of with effective and aggressive marketing.”
Exports to Mexico surged in 2009, despite the peso’s devaluation and some short-term disruption due again to the Novel H1N1 crisis. “We can maintain this level in Mexico as long as our trading relationship remains strong,” Seng adds. “Although there's a desire in Mexico to be more self-sufficient in pork production, they just don’t have the grain base to support it.”
He expects continued growth in Australia and Taiwan, as well as in Western Hemisphere markets such as Canada, the Caribbean and Central America. In fact, USMEF forecasts that global U.S. pork exports will rebound by at least 3 percent this year, come close to matching 2008’s record level in 2011 and exceed that by 2012.
“Our export markets are very diversified — all of our eggs are not in one basket,” Seng concludes. “Obviously in these challenging times, that’s a good thing.”
Swine Veterinarians Face Opportunities and Challenges
“For swine veterinarians, the opportunities and challenges that we will face in 2010 go hand-in-hand,” notes Paul Ruen, DVM, Fairmont Veterinary Clinic, Fairmont, Minn.
Leading the list is to stay focused on the health and well-being of pigs. “We are in a position to know what happens on farms, to share ideas and promote change when appropriate,” Ruen notes. “We’re trained to diagnose problems, then come up with solutions and prevention strategies.”
Here are some key areas as Ruen looks ahead to 2010:
Porcine reproductive and respiratory syndrome: “We have to do a better job with PRRS,” he contends. "The disease has been wreaking havoc for over 20 years, costing producers billions of dollars and increasing the cost of pork."
Ruen says pork producers and veterinarians need to think bigger to make headway. Among the challenges:
Success has been fleeting. “We can shorten the duration of a clinical break; we can stabilize a population of pigs and take a farm PRRS-negative; but we have largely failed to keep the disease out of farms in geographic areas involving any significant pig numbers,” he says. “That must change.”
The industry cannot wait for the development of effective vaccine, Ruen says. The virus is quite unstable and has demonstrated the ability to move through vaccinated pigs. “While we continue to learn more about PRRS virus biology, it has not yet helped us stop the disease impact,” Ruen notes. “We have to group efforts on farms and in regions to have more sustainable success.”
Better biosecurity helps. Quality research has improved overall knowledge in this area. Ruen points to several veterinary practices, including his own, that are involved in research with Scott Dee, DVM, University of Minnesota. He’s working to demonstrate biosecurity’s impact, including air filtration, to prevent new PRRS breaks in Midwest sow farms. After several years of air filtration at boar studs in pig-dense areas, the results are encouraging. “Filtration is now being applied across commercial sow farms, and it will have an impact,” he says.
Animal well-being: “We have the opportunity to work with pork producers to demonstrate to the public a high level of pig care on farms,” Ruen says. “Consumers want to be assured that the animals under our watch are treated humanely.” He sees PQA Plus and the related site assessments as providing a solid framework for that goal.
“However, we are disconnected from a consumer who relates to human/animal relationships in terms of house pets,” Ruen adds. “We can do a better job showing what it means to be good stewards of the pig. We should find ways to allow the public access to our world of animal agriculture from conception to fork.”
Research on methods and application of humane euthanasia and pig care will be increasingly important.
Pig and people health: “We need synergism in the areas of health inputs, population-health management and pathogen elimination,” Ruen says. “Major advances in our industry have occurred when change was positive in multiples.”
For example: leaner genetics that improved production economics by reducing feed costs and improving carcass value; individual breeding/gestation housing, which enhances animal care, feeding and fertility; confinement housing, which provides safer working conditions, requires less feed to grow a pound of pork and provides comfortable environments for pigs; concentrated manure storage, providing high-quality fertilizer that, when incorporated into the soil, binds better than commercial fertilizer so there’s less ground-water contamination risk and higher corn yields. “That is sustainable agriculture — better pig care, greater safety, higher production and safe, low-cost food for consumers,” he notes.
Can the next synergy come from disease elimination? Veterinarians can provide leadership to producers who want to remove pathogens from herds and pig flows — diseases such as mycoplasma, pleuropneumonia, dysentery and influenza, Ruen says. “Could a practical approach be developed to add Strep suis, H. parasuis and A. suis to that list?”
There’s consumer pressure to reduce agriculture’s use of antimicrobials, whether or not science is supportive. Producers are asking for more control over health input costs. “How can we manage disease differently to minimize the need for those products, yet improve pig well-being and production?” Ruen asks. “There is great opportunity for those with the creativity to develop solutions.”
Checkoff Programs and Priorities
“While analysts and economists tie themselves up in knots over whether to be optimistic for 2010, most pork producers are simply buckling down, cutting costs, managing risks and anything else that has to be done to stay viable,” says Chris Novak, chief executive officer for the National Pork Board. “On behalf of these pork producers, the pork checkoff is buckling down as well to focus on the things we know are critical to the pork industry’s future success.”
Novak outlines NPB’s program areas and priorities for 2010.
“First, athough NPB has fewer dollars available, we’re focusing more of our investments on activities that can help move more pork,” he says. He points to successful partnerships with the nation’s top grocery retailers, including Wal-Mart, Kroger, Costco and many others. “Despite the consumer confusion created by Novel H1N1 2009 influenza, these retail partnerships have helped us increase year-to-date fresh pork volume by nearly 8 percent compared to 2008,” Novak says. This year, more of NPB’s domestic marketing budget will work to build on partnerships that leverage checkoff funds with support from retailers and reach consumers with messages about pork’s versatility and value.
Second, NPB will continue to invest in expanding international pork trade. A key priority in 2010 will be to improve market access for U.S. pork. The trade disruption in 2009 related to political decisions on H1N1 and alleged safety concerns about animal-health products demonstrate the importance of maintaining a scientific basis for trade decisions. “That’s one reason why checkoff-funded research is helping document the safety of U.S. animal-health products,” Novak says. “These efforts will continue in 2010, along with investment in international pork marketing and promotion.”
Third, checkoff efforts will remain committed to protecting a producer’s right to raise hogs in a socially responsible and cost-competitive manner. Videos released by vegetarian-activist organizations continue to target modern farm production practices, Novak notes. “We will continue to fight on pork producers’ behalf to ensure that our food-chain partners and consumers understand the need for, and benefits of, modern production practices,” he says. At the same time, the We Care initiative is working to ensure that all producers practice proper animal care and handling, so that the industry can document how today’s methods provide U.S. consumers with a healthy, safe, environmentally friendly food supply.
Finally, tough times require careful examination of every facet of your business to find new ways to create success. NPB will complete its new strategic plan, which will help focus time and resources on pocketbook issues that are important to all pork producers.
“We are evaluating The Other White Meat brand to find new ways to motivate consumers to choose pork,” Novak says. NPB also will review all programs to ensure they create the return on investment that pork producers expect.
“Unlike the analysts and economists, we’re optimistic about 2010,” he adds, “but that’s because we know pork producers are hard-working, resilient individuals who are dedicated to finding a better way.”