The Record Low Hog Market

Livestock Update, January 1999

Allen F. Harper, Extension Animal Scientist, Swine, Tidewater AREC

It is very likely the most depressing time for hog producers in the history of commercial swine production. Prices quoted for the week ending December 11 indicated carcass prices in the eastern corn-belt of $21.28/cwt. and $23.18 in the mid-south. These carcass prices equate to live weight prices of $15.53 to $16.92/cwt. Current losses per finished market hog (conception to market weight basis) are estimated at $56.00 or about $22.4/cwt. Producers raising hogs under contract for other owners are somewhat insulated from this market. However, contract growers do have legitimate concerns as to how long their contractor can withstand the poor market. Fortunately, there have been no reports of significant contract defaults in the Virginia region. Nevertheless, it is truly a crisis situation and no producers, industry leaders, economists or others can seem to find reason for a major market correction, at least in the near term.

What are the contributing factors in this disaster? Production level is the major contributor. Since the last full week in September, hogs have been coming to market for federally inspected slaughter at a rate of over 2 million head per week. The only exception was the short Thanksgiving Holiday week. The week ending December 13 including Saturday's kill set a new record of 2.231 million hogs slaughtered. This rate of slaughter over such an extended period of time is unprecedented and it illustrates the large production capacity that has developed in U.S. pork production.

A second contributing factor is that some slaughter capacity that would have been available to help deal with the large supply of hogs was lost during the past two years. For example, the Thorn Apple Valley plant near Detroit, Michigan stopped slaughtering hogs in 1998. This removed 60,000 head per week of slaughter capacity potential from the industry. Smaller plants in Moultrie, Georgia and Worthington, Indiana have closed recently as well. Existing plants are running at high rates with some Saturday shifts but the loss of even a few plants has impacted the industry's ability to deal with the large supply.

Another factor is that there is an over supply of hogs in other parts of the world as well. For example, European producers are experiencing very low prices at this time. Producers in the United Kingdom are being hit especially hard because of low prices and new government animal welfare regulations that will mandate changes in the way sows are housed and fed on hog farms in Great Britain.

And finally, our opportunity to export more pork products from the U.S. has been hampered by the poor Asian economy. Although exports of U.S. pork have improved in recent years, the weak purchasing power of the Yen and other Asian currencies has slowed export expansion and prevented major relief for the excess pork supply.

Appeals are being made by the National Pork Producer's Council to enhance efforts to export pork from the U.S., to increase purchase of pork for use in school lunch programs and to stop importation of hogs from Canada (about 4 million per year) destined for slaughter in the U.S. The North Carolina Pork Producers Association is petitioning the N.C. Department of Environment and Natural Resources to allow the Smithfield Foods Tarheel, N.C. plant to increase it's weekly kill from 144,000 head to 172,000 head. All of these items could help but the hog market economists indicate that until the number of hogs available for slaughter backs off to less than 2 million per week, price relief cannot be expected.

What can producer's do? Obviously there is no single management item or group of practices that can be implemented to result in profits during this extremely low market. During this time the producer's goal is to do the things necessary to keep financial losses as low as possible while waiting for profitable prices to return. Some may find it necessary to exit the business, but this decision should be made carefully and objectively, preferably with sound economic advice from a reputable advisor. Some ideas to consider in dealing with the current financial situation are as follows.

• Trim the herd of any and all marginally productive breeding animals. Sows and boars that fit this category are often unprofitable even during periods of good prices; during this market such animals are especially costly to maintain in the herd.

• Apply phase feeding and split-sex feeding to insure that pigs in various weight and age groups receive adequate nutrition but are not fed diets that are more nutrient dense (and costly) than necessary. For example, do not feed market pigs late in the finishing phase diets that are actually formulated to meet the needs of younger grower pigs; or, do not feed diets formulated for leaner gilts to fatter barrows late in the finishing phase.

• Utilize a phase feeding "budget" in the nursery. In this manner only a limited amount of the very costly phase one nursery diet is used on newly weaned pigs before shifting to less costly phase two and phase three diets.

• Continue to feed diets that are formulated to meet the nutritional needs of the pig but reevaluate formulations for the removal of unnecessary medications and additives. Also evaluate alternative ingredients and formulations that may reduce cost.

• Tune and maintain all facilities and equipment on the farm that generates variable cost. For example, tune and maintain gas heaters for peak efficiency and keep curtain-walled barns adjusted for proper ventilation and proper temperature control.

• Market pigs on the lighter end of the packers carcass weight matrix without going below the point at which sort loss penalties for light carcasses are imposed. An added advantage of this practice is that it helps to reduce the total weight of pork supplies going into market channels.

• Contract input supplies such as corn, soybean meal or other ingredients when good price opportunities are presented.

• Contact insurance and electrical rate suppliers to investigate to possibility of reduced premiums or rates.

• Stay current on accounts payable or renegotiate them under the CAREFUL advice of creditors. Avoid high interest credit sources for farm debt such as credit cards.

• Tom Vincent, President of the Agricultural Banking Division of Brenton Bank in Perry, Iowa offers the following suggestions for producers that must negotiate with their creditors this winter.

• Have a business plan and be prepared to discuss it along with a contingency plan.

• Don't hesitate in using outside resources, such as a consulting vet, Extension specialist, financial consultant or CPA, if you are experiencing some difficulty in the operations or are contemplating a significant change. By using an outside resource, you have added credibility to your plan in the eyes of banker.

• Good records prove your creditworthiness. Records are best used for management and decision making first. Records are also vital to use in reviewing the operation with your banker and/or investors and for computing taxes.

• Review of an operation's performance over time, such as a four- to five-year period, which is important regardless of the current cash hog market.

• Lenders use trend analysis to review a request for new or existing credit. Trend analysis focuses on certain production factors, such as sow productivity, throughput as it relates to facilities, mortality, feed conversion and carcass performance.

• Lenders use financial trend analysis typically to review such things as profitability, return on assets, return on equity, leverage, liquidity which is typically defined as working capital and trends in cash flow performance.

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