Last week some U.S. lean hog prices reached 86¢ getting even closer to the 90¢ lean which we have predicted and expected. In the ying and yang of the Pork Industry it’s amazing to have U.S. pork cut-outs at 85.64 while lean hogs are in the same range. Packers have gone from packer margin spreads of over $50 per head to now next to nothing. It is said the surest cure for high prices is high prices, it appears excellent packer margins lead to new packing plants and now less then robust packer margins.
We still expect further increases in cash lean hogs. Packers will resist the increase and in the meantime hope to God Pork Cut-Outs higher. The dynamics will be pressure from the pork sales side of packer’s organizations. It’s too simple to say we will cut kills to increase margins. The real challenge is the competitiveness to fill meat orders and maintain shelf space. I.E. one packer doesn’t want to lose business to a competitor from lack of supply; it’s a long road to pull the customer back after you told them sorry “We have no pork.”
It is truly amazing cash has pulled higher in the face of tariffs on U.S. pork from Mexico and China. It’s pulled higher despite the belief there is abundant pork. In reality there has been no bullish news. The market has moved higher because of seasonal hog supply decline. We also believe demand could be enhanced by retailers featuring pork to take advantage of pork cut out prices nearly 1/3 the price of Choice Beef. Prices are determined by Supply and Demand, its not complicated. Less hog supply and constant or better demand leads prices higher. Last weekly U.S. hog slaughter was the lowest full week of year at 2,168,000.
Ontario Pork Congress Report
Last week we attended the Ontario Pork Congress in Canada, which is held in Stratford. Our Report:
Ontario has about 300,000 sows, it has two producers with over 10,000 sows and they are in the 15,000-sow range. This means Ontario has lots of producers.The bulk of Ontario’s producers are of Dutch descent. They are good producers. Their primary business model is of family farms. Have pigs, own land, put manure on land, grow corn, feed pigs, buy more land, feed pigs, grow corn, buy more land.
The business model has worked well. Farmland in Ontario has reached $20,000 CAD per acre ($44,000/ hectare). 20 years ago land could be bought for $3-4,000 per acre. The equity surge has been phenomenal. The pigs were part of equations that has created families with 10’s of millions in wealth.
Ontario has two packers Sofina (44,000 approximately a week) and Conestoga Pork (30,000 a week). Sofina is privately owned, Conestoga is a hog producer owned co-op. About 25,000 head a week are sent to Province of Quebec packers.
U.S. packers have not been buying many hogs from Ontario. It is expected that could change when the Hadfield Coldwater, Michigan plant goes to a second shift. For many Ontario producers four U.S. plants are closer then Quebec plants. They pay U.S. dollars and unlike Canadian Packers some of the U.S. packers accept pigs fed Paylean. A probable $3.50 per head advantage.
There are some new sow barns being constructed in Ontario. We understand that banks are tightening equity amounts and cash needed to build. The cost of new finishing barns are in the $450-500 CAD range per head. Most hog contracts pay in the $18 per head range.
PRRS has been rampant in Ontario. Every major Ontario Genetic company except Genesus has suffered from a break in the last six months. Live in glass don’t throw stones but the reality of PRRS has turned the Ontario Genetic Industry upside down.
We have been at World Pork Expo, Alberta Pork Congress and Ontario Pork Congress in the last three weeks. We have been exposed to equipment companies that cover most of North America. Our sense is there is next to nothing relative to the 7.2 million sows in USA–Canada of new sow units are starting to be built. Its quiet. Why?
- Future Hog Market Fear-Profitability
- Fear of Global Market access i.e. tariffs
- Increased feed costs
- Difficulty to get building permits-equity-and cash needed to build
- Cost of new building and equipment have surged
- Most importantly the availability of labor for farms is harder then ever before. U.S. and Canada unemployment is at decade lows. In the U.S. there is little transient immigration to supply farms or packers. Why start another farm when you don’t have enough people to start fill the ones you have?
We expect labor challenges will curb productivity gains