Steep financial losses for over two years have brought the pork industry to a crossroads, says Kent Bang, regional vice president, Bank of the West, Omaha, Neb. Bang addressed pork producers gathered Thursday at Kansas State University’s annual Swine Day.
Bang says that hedging strategies will continue to increase in importance for producers. “It’s all about risk management going forward,” he says. “Make sure to have qualified people in your operation who understand hedging and have a margin mentality.”
Bang instructs producers to watch closely for opportunities to lock in profits, or even small losses if necessary. “We probably have more volatility and risk in this business than ever before,” he warns. “Reducing risk exposure will be increasingly important.”
Bang urges producers to continually update budgets and make changes when needed. “Take action early if changes are needed, do it now.”
“We will see significant changes in the industry,” predicts Bang. One of those changes will be extended periods within the hog cycle, he says. One reason is the higher level of fixed assets typical in the industry today.
The typical higher investment seen in the industry today makes it much more difficult for unwinding production and to scale back quickly. “More contractual arrangements and a higher degree of specialization typical in the industry today add to the difficulty of making quick reductions of size and scale of operations,” says Bang.
The period of 2004 to 2007 was the most profitable period in the pork production’s history and 2007 through 2009 is the most unprofitable. “Both periods are longer than historic cycles in this industry,” says Bang. He is quick to add that he doesn’t predict that the height or depth seen with the last two cycles will necessarily accompany the longer cycles going forward.
According to Bang, the current down cycle has been a result of several issues. The biggest factor is from increased corn cost brought on by corn-based ethanol production. Upward corn demand is likely to continue. Bang predicts that the ethanol blend rate may be increased to the 12 to 13 percent area to better utilize the ethanol production capacity that has become available. Currently, the approved blend rate stands at 10 percent. He also cites pig production increases resulting from use of circovirus vaccines as a contributing factor to the industry’s current down turn.
Bang predicts that obtaining credit may be increasingly difficult for pork producers. “We’re not making our lending policies stricter, but we also will probably not be making any new swine credits soon,” he says. “There are fewer lending institutions to go to out there and that’s the bottom line. From a lending standpoint, it’s a new world,” the banker notes.
Bang believes that since August, pork producers are more serious about reducing sow numbers. “Further sow reduction is required before the industry sees profitability,” he says. He believes a further reduction of 308,000 sows will be required from current levels.
"The diversified farm with grain production has weathered this storm best, however, I'm not sure that model will be the one that prevails in the long-term," Bang adds. "My thinking is that there will be more market risk participation by the packer-processor in the future. I just don’t think we can move back to a diversified farming model as all segments, including corn production have become more specialized."