As we watched news broadcasts showing the devastation that Hurricane Mitch created in Honduras and Nicaragua this fall, you couldn’t help but feel sorry about what happened. One such news report observed that while many deaths could be directly attributed to the hurricane, many more could have been avoided if there had been better emergency planning, a better infrastructure, more resources and less poverty. Those things could not have prevented the hurricane, but the people or their governments could have prepared better to avoid some of the awful consequences.
With today’s market hog prices, Mitch is among the few news items reminding us that some people are facing bigger problems.
However, in the business world nothing rivals the financial disaster of hog prices dropping 66 percent from the 20-year average. What is going on? How can hog operations survive through this year ù let alone plan for the future?
The long-range issues I normally address in Pork Business Decisions are harder to think about when you’re losing nearly $50 per head on every hog sold. It’s easy to adopt a victim mentality and lash out at food retailers for their healthy profit margins, at packers for bidding low prices, at producer organizations for collecting checkoff and at “experts” for continuing to lend advice.
It’s important to look for or ask what are the real problems and on which area should you spend your time? Long-range planning in a market where prices are in the teens may seem like fixing the roof in a hurricane, but long term, it can minimize the damage.
What are the problems?
Retail pork margins during the fall of 1998 were considerably higher than normal, but many large pork sellers are now running specials and moving tons of pork. Consumer demand for 1998 was 7 percent higher than in 1997, and exports were up more than 30 percent. Meanwhile, product prices were only 1 percent lower than year earlier levels.
Efforts to run product sales, issue coupons and discount pork at retail will help move more meat. The industry needs brisk movement to continue to prevent an even worse market slump.
A bigger problem, however, is limited slaughter capacity, which has caused the live hog demand to be lower than the demand for finished product. Hopefully, increased packer margins will encourage more capacity to become available. It seems the pork industry is suffering from a lack of coordination between production and processing ù we don’t have too many hogs, we have too little slaughter capacity.
Shrinking production is one way to strengthen prices in a shrinking demand situation (as in beef or lamb), but it’s not a wise long-term strategy for a growing global pork industry with increasing demand.
The industry needs to do a better job of monitoring margins, communicating throughout the chain and expanding product movement ù all good reasons to invest in the checkoff. However, most of you can more directly affect your cash flow by controlling costs on the farm. Venting your frustration at others may make you feel better and the need to do so is understandable, but it won’t help your bottom line.
Whether it’s to survive this year, or to compete long term in a global market, lowering operational costs is important. But it needs to be done in an informed way vs. a slash-and-burn tactic that may cause additional financial damage. (See accompanying story.)
You should examine every expense and recalculate every cost benefit ratio under current
market conditions. There’s no way to do that right without detailed production and financial records. Production habits in feed formulation, medication, vaccination and the like are easy to form. The habit may not be as well justified with low hog prices as with high returns.
Cutting some things, like veterinary services, vaccinations or labor, could increase total costs. Keeping replacement gilts from the finishing floor may save money but hinder progress.
Savvy business people often zig when everyone else zags. There are so many savvy pork producers that timing the zigs and zags is hard to do.
Determining when to expand to hit the right time of the hog cycle is not a simple matter. When you add in the rush to get facilities grandfathered in before ominous, environmental regulations are written, it makes the lack of coordinated growth even worse.
Has industry growth become a game of chicken with many producers hanging on to expansion plans hoping others will pull back? Or is the psychology getting so bad that everyone will pull back resulting in a short U.S. hog supply in 2001 or beyond?
For today’s perspective, a short hog supply may seem a welcome sight ù it would beat suffering through current prices. A better overall scenario would be to grow the industry in a smooth fashion profitable for you and others in the chain. Volatile hog cycles feed on themselves, cause friction among the supply chain and confuse customers.
Packers will hesitate expanding slaughter capacity if they think the hog supply will fall short of what they need to operate efficiently in the future. So, responding to today’s market by shrinking the industry could result in yet another game of chicken between producers and packers.
Which side will be brave and have faith in pork’s global possibilities? You have done your part in supplying the hogs. Packers need to catch up and have faith that hog supplies will be there.
The key to expansion decisions goes back to the same mantra ù cutting costs. How low can you compete, compared to other producers?
It must be made clear this does not mean cutting quality. Competition from other foods requires us to improve quality while cutting costs. It seems unfair ù but that’s reality.
Expansion, just like inflation, often covers up poor management and can hide money wasters. We may be entering a decade of deflation, especially in agriculture. Poor management will be exposed and good managers will earn a premium. Firms with strong management and controlled, low production costs should be the only ones considering expansion. But, expansion alone will not lead to lower costs, and can sometimes increase problems.
Consider your system’s design and how expansion could improve pig-flow management. You can often reduce costs by coordinating weanings to accommodate all-in/all-out schedules and segregating pigs by age. That kind of management can prevent diseases that are spread when young hogs are exposed to older animals.
Expanding an operation carefully may help balance your pig flow by facilitating a switch to feeding batches of pigs that are all the same age. This can improve herd health to lower costs.
Through boom-and-bust cycles accentuated by the current bust, a natural consequence is that outdated and inefficient facilities will close. That is simply normal economics at work. But on a personal level, it’s a crisis.
Tough decisions have to be made now. So, get up on the roof to scope out your situation. You can hunker down and weather the storm, or go somewhere with better weather. Every situation will be different, and many economic disasters lead to opportunity for someone. If political intervention prevents the difficult but necessary restructuring, the industry will lose market share.
Packers not immune
Shakeouts also occur in the packing industry, just as they do in car sales, railroads, toy stores and farm-implement dealers. Early in 1998, hogs weren’t as plentiful and packer margins were tighter. Three of the more outdated, less efficient slaughter operations in the United States closed down leading to the current capacity shortage. Today’s scenario of abundant hog numbers and improved packer margins will lead to increased capacity in the future.
If the three closed packers had “fixed the roof during the storm” rather than “fleeing the weather system,” slaughter capacity would be in better shape now. But, through continued cycles of success, failure, rebuilding and growth the pork industry will be more competitive long term in the global market.