Pork Commentary, June 15th, 2020
Jim Long, President-CEO, Genesus Inc.
For the second week in a row, U.S. market hog harvest was higher than a year ago. 2,457,000 vs. 2,439,000. We can only hope that U.S. plants can continue to ramp up production. Strong Gross Packer Margins certainly give an incentive.
Daily National Base Lean Hog Carcass weights continue to decline. The first four days of last week averaged 213.88 lbs; four weeks ago averaged 220.17 lbs. No doubt weights have come off the extreme highs. We certainly have a hard time fathoming how some can claim 4-7 million hogs backed up due to earlier plant slowdowns. In context, a week before averaged 215.51 and a year ago 214.58.
There is no way in our mind that hogs can be backed up to the extremes some are stating when we see average weights continuing to decline each and every week. We expect some producers are backed up while others have pulled hogs ahead. Depends on where in USA, which plant, fear of plant closing, feed ration management, etc. Many dynamics in play.
Question is how sow herd liquidation has happened. Last quarter December to February the USDA inventory indicated a 96,000 decrease. In that quarter U.S. sow slaughter was up 34,000 from the year before. When we look at the second quarter it appears to us that the U.S. sow slaughter will be up about 100,000 when final data is put together. We expect when combined with lower gilt retention and ongoing sow mortality the U.S. sow herd will decline in a range of 150-250,000. We realize this is a wide estimate.
We expect whatever it ends up on June 1st liquidation, currently cash isoweans and feeders at next to nothing and market hogs with a $40 loss per head is grinding the business to death. If it continues without profits more and more liquidation will happen. It’s hurting Big and Small. Some benefit from ownership in packing plants or percentage of gross packer margin but many do not.
Depending on the length and depth of the liquidation of the sow herd, packer capacity issues will not be a factor as millions of hog production disappear. Some call this Destructive Capitalism. Others destroying people’s livelihood and dreams.
Many of us have been in this business a long time. We remember the low prices of 1993-94 which ended most if not all the field farrowing – outside operations (now they would get premium). At the same time, there was the rise of Murphy Farm, Carrolls, Heartland Pork, Premium Standard Farm, Feed Company pig production in Purina. The low prices of 1998-99 hit and many of the organizations if not all ended up with restructured ownership due to the massive financial losses. Too big to fail was not true.
Over the last twenty years, there have been the issues of the hog cycle which continued to lead to further consolidation. 2019-2020 we have hit another big hog price issue. We have had Black Swan events related to ASF, Trade, and Coronavirus issues. Wham, Wham, Wham. It’s a big challenge. The word Force Majeure seems to have become as common as pigs per sow per year contracts of many types have been evolved. (nice word for broken). As a friend of ours says “no one goes broke if they can help it.”
By nature we are optimistic. Much as anyone in this industry needs to be. The upside we are producing a product that is the most consumed meat in the world. We know overtime the countries with the most competitive cost of production and access to markets will win. We also know that Darwinian Capitalism (hog cycle) will lead to higher prices from lower supply. It’s about capital and courage to get to the other side.