March 31, 2008

 

US pig farmers urged to quit the business

 

 

Agricultural lenders are encouraging US swine producers to trim their herds, or in some cases, to quit the business altogether to cut their losses because of record-high feed costs and hog supplies.

 

The huge supplies and high feed costs are key factors weighing on hog producer returns, which currently are estimated at US$30 to US$40 losses per head.

 

Demand for corn from the ethanol industry and the low value of the US dollar against other currencies have been driving corn prices up. May corn futures prices on Thursday closed at US$5.55 1/2 per bushel. This is up 43 percent from the quote of US$3.88 1/2 on the same date a year ago for the May '07 contract and more than double the US$2.22 1/4 close for the May 2006 corn contract on March 28, 2006.

 

However, first-quarter hog prices, while depressed by the record large supplies, are not far out of line with the 10-year average.

 

Bob Brown, private analyst in Edmond, Okla., said the year-to-date average price for 51 percent to 52 percent lean hogs through Thursday was US$53.77 per hundredweight. That compares with the 10-year average for first-quarter prices at US$55.37.

 

Quarterly hog report adds to concerns
 

The quarterly hogs and pigs report released Friday afternoon added further to the concerns. The data showed all hogs and pigs as of March 1 at 107 percent of a year ago, well above the 104.6 percent average of analysts' estimates in the Dow Jones Newswires pre-report survey. The USDA's figures for most categories were above the high end of the ranges in the pre-report survey. Analysts called the data bearish for lean hog futures prices Monday.

 

Agricultural lenders are exceedingly concerned about the conditions facing swine operations, said Lee Fuchs, vice president, Capital Markets, FCS Financial, in St. Louis. The extremely high feed costs were not anticipated or prepared for, he said. Corn prices are at US$5 or more per bushel and will likely be there for some time.

 

Chicago Board of Trade May corn futures Friday closed at US$5.60 1/2 per bushel.

 

"Lenders are trying to discourage any new construction - and for expansion in particular," Fuchs said. "I think we're in for a very rough 2008 and 2009. I don't think we'll see much of a break in corn prices, and there has not been enough (breeding animal) liquidation to significantly trim the herd," he said. Some expansion is still occurring from decisions made one to two years ago, Fuchs said.

 

"High feed costs are the number one problem for producers, and we don't see any relief ahead," Fuchs said. "Unless corn prices provide some relief, our advice to many hog producers is to get out of the business - if they can." In the next two years, producers could lose all they made in the past four years, he said.

 

John Trewin, senior vice president and chief financial officer at United Bank and Trust in Sheffield, Iowa, said a number of the privately-owned hog operations in north-central Iowa are exiting the business because of recent losses. Some of the hog producers who are also grain farmers are making enough money on the grain that they no longer want to produce hogs.

 

He said, however, there is still considerable expansion going on in that region as well. New swine buildings are still going up, and producers who are in integrated programs own most of these new units, he said.

 

In integrated production and marketing programmes, the risks are shared with others up or down the chain.

 

Trewin said only so much money can be made in the life cycle of the pig, and its sale value must be enough to cover all the costs.

 

Mark Greenwood, vice president of Agri Business Capital, a division of AgStar Financial Services, estimates producer losses during the past six months at about US$30 per head. Current losses on hogs sold in the spot markets are about US$40 per head, he said. AgStar, part of the Farm Credit System, has a swine operation portfolio of more than US$1 billion, so it is especially concerned about the outlook for hog and grain prices.

 

One thing that might help, he said, would be to reduce sale weights by at least 5 pounds per head when slaughter supplies get down to a more reasonable level.

 

"It will be difficult to do this at 430,000 head per day but if we get numbers below 420,000 and we can also reduce sale weights, that might help with supply issues," Greenwood said.

 

Bill Wagner, vice president of Ag and Commercial Lending with First Mid-Illinois Bank and Trust in Highland, Ill., said his bank is not funding any new hog buildings at this time. Wagner said the bank is working with current customers to help them through the crisis presented by low prices and extremely high feed costs.

 

Wagner said, however, that some producers have used price protection on hogs and grains as a bugger.

 

"If they can ride through the next six months, perhaps the conditions will improve for producers," Wagner said.