A necessary time
The spring of 2009 is one the pork industry would like to forget. With expectations of long awaited profitability, pork producers thought they could see light at the end of the tunnel. Reduced production along with a steady to improving demand for pork would enable revenue to rise enough to make the ink black again. The onslaught of H1N1 flu (I will call it “swine flu” this one time!) spread panic around the world and made pork a “dangerous” food overnight. Exports of pork, which previously had accounted for 25 percent of all U.S. production, were cut in half. The value of a hog dropped 20 percent in a week; price recovery has been slower than hoped as our foreign trading partners (notably Russia and Mexico) have been slow to reintroduce U.S. pork to their consumers. One bright note is our domestic demand has remained excellent despite the scare; this is a tribute to science over emotion and the ability of industry leaders to educate American consumers on the safety and value of pork supplies. The tunnel remains dark, however, as profitability in the production side of the pork industry remains elusive.
The H1N1 flu, as devastating as it has been to pork revenues, is only a piece of the puzzle to the financial losses in the pork producing business. Even before the H1N1 debacle, the major cuts in pork production (5 percent-10 percent were anticipated as a reaction to higher feed costs) never occurred, as packers have been able to fill their needs without having to bid up for hogs. It is amazing to note the pork production industry has been unprofitable for 21 straight months (since September 2007) and still there has not been a major cutback in production. As one analyst put it simply, “There are simply too many pigs.” This is by far the longest period of red ink the industry has ever experienced. Why has the pork industry been slow to reduce its numbers to regain profitability? There are several possible answers with the most obvious being the inability of large mega-units to adjust production downward. Due to a web of contractual responsibilities to packers and contract finishers, it becomes difficult for them to operate at any level other than “full speed ahead.” Regardless of the lack of profits, these units (producing 50,000 or more pigs per year) simply try to be efficient as possible, produce as many pigs as they can, and hope their financial lender will oblige and keep them going. Using the language of the recent financial crisis, they appear to be “too big to fail.” As GM, Chrysler and some of the main U.S. investment banks have shown, failure can become reality!
A second explanation of “too many pigs” lies in the present structure of the pork industry. Although producers themselves have the equity in their business and need profitability to survive, the industry is very much influenced and controlled by the large agribusinesses which provide inputs and services to those producers. These would include genetic seedstock companies, feed and grain entities, veterinary and pharmaceutical consultants and services, and hog packers. The goal of the aforementioned is not necessarily producer profitability but rather selling their products and services. A 10 percent reduction in hog numbers would mean the loss of 2,000,000 pigs, a substantial blow to the volume of business these companies do. Their recommendation is always to keep producing more and do a better job with their products and services. In reality, swine agribusiness companies have done an excellent job of improving production; unfortunately profitability is not enhanced in an overcrowded market. When one really thinks about it, the only entity enhanced by reducing overproduction is the producer himself (and probably his financial lender!). All the companies depending on those pigs for their profits are hurt along with consumers who pay higher prices for pork. It seems as if the momentum of the industry is always calling for more pigs; thus the decision to cut production becomes difficult.
Pork producers have come to a critical juncture in their operations. The late spring run-up in feed grains is forcing decisions on many operations. The structure of the industry needs to change and production numbers must come down in order to return to profitability. This, in turn, will increase prices consumers pay for pork. It indeed is an unfortunate, but necessary, time in the economic cycle of pork production.
Bob Elliott is a Bureau County pork producer.
