Victims of Our Own Success, By Todd Thurman, SwineTex Consulting Services

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n many ways, the US Swine Industry is a victim of its own success. In the past 30 years, we’ve seen remarkable increases in productivity and efficiency, but those increases have resulted in oversupply that threaten profitability and the economic sustainability of the entire industry.

In 1999, I took my first full time job with one of the top 5 pork producers in the US. That year, if memory serves, we gave rewards to sow farms that produced 19 pigs per sow per year and more than 80% of our finishing farms had feed conversions over 3.0. These days, that level of performance would be considered a four alarm dumpster fire.

We’ve come a long way. In 1999, we produced 1.31 metric tons of pork per breeding sow in the US. In 2019, that number had ballooned to 1.98, a 50% increase. During this time, cost of production has increased nominally but decreased when adjusted for inflation. In 1999, cost of production was about $97/head. Adjusted for inflation, that’s a cost of about $149/head which is slightly higher than current COP of about $145/head. That alone would be impressive, but it’s made even more impressive when you consider those costs of production from 1999 were based on a 250 lb market hog and today we’re marketing hogs in the 285 lb range. So, the inflation-adjusted cost per lb of live weight is actually almost 9 cents lower.

Based on all that success, you might assume that US hog producers are extremely profitable…well, no. When evaluated on an ROI basis, this is essentially a break even business. While the industry has slightly fewer sows than in 1999, we’re producing way more pigs than we need domestically. Fortunately, we’re very competitive on the global market and have, for the most part, so far found markets beyond our shores for the excess as exports have increased dramatically from virtually zero in the early 1990’s to almost 30% of total production now.

While the export markets have been unquestionably good for US producers in terms of carcass utilization and providing an outlet for excess production, it hasn’t translated into greater profits. In fact, in many ways, this is a less profitable business now than in the past and it’s certainly more risky now than it was 20 or 30 years ago. The reliance on exports exposes the industry to forces far beyond simple supply and demand such as global trade, geopolitics and global industry trends and contributes to huge market volatility.

I’m a huge supporter of free trade and I think there are few scenarios where exports don’t remain an important factor in the success of the US Pork Industry but continually increasing production every year and expecting dependable markets to continue to soak up the extra production is not wise. In a perfect world, global markets would realize that the US can produce pork better and cheaper than they can but with today’s trends away from globalization and toward more isolationist/self sufficiency oriented policies, relying on those markets long term is even more precarious than in the past.

The increases in volatility comes at a great cost. Dr. Brad Freking, from New Fashion Pork, recently appeared on the Swine It podcast with host Márcio Gonçalves. He stated that in order to be confident in surviving the swings, pork producers should have access to at least $100 per pig in working capital. That’s between 20 and 25 Million for a 10,000-sow farrow to finish system. The result is a system that’s unsustainable for independent producers who are selling their pigs on the open market or on lean hog futures based contracts. These are not new issues, in fact they’ve been brewing under the surface for years but the recent issues with COVID-19 and the resulting disparity in live hog prices and pork prices have put these issues in sharp focus.

Some possible solutions to this unsustainable status quo are 1) move to a 100% packer ownership model where all pigs are owned by packers through the entire live supply chain, 2) the wide adoption of marketing contracts that factor in the cutout value in determining live pig prices or 3) the option to use a cutout futures contract to more effectively manage risk. The first option is not practical for a variety of reasons and I don’t really even think it’s desirable for packers. We may see some increases in packer ownership of live production but I don’t believe we’ll see a significant shift further in that direction. That leaves us with options 2 and 3. I think some combination of those two is the only practical way to address these fundamental issues.

Finally, the US industry needs to become smaller, significantly smaller. As we continue to improve efficiency, we’re constantly producing more pork than can be supported with profitable prices. The industry has been in consolidation mode for over 20 years now and we can’t keep consolidating our way out of this. We need a significantly smaller sow herd and we need to make adjustments on an ongoing basis as productivity continues to improve. This is the next phase our industry faces, a period of contraction or “right sizing” if you prefer, not because demand for our product is waning but because we’ve become too good at what we do.

 

About the Author: Todd Thurman is an International Swine Management Consultant and Founder of SwineTex Consulting Services, LLC. SwineTex is a US-Based provider of consulting and training services to the global pork industry. To learn more about SwineTex Consulting Services, send an email to info@swinetex.com or visit the website at www.swinetex.com.

©Copyright 2020 SwineTex Consulting Services, LLC. ALL RIGHTS RESERVED


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