Who will be the first to quit?

With daily federally inspected slaughter continually running above 400,000 pigs, there is limited evidence of a reduction in pork production in the US. On April 1, the Canadian breeding herd was down 12%, and there are lots of individual stories suggesting that liquidation in Canada is continuing.

 

In the US, reduction of the breeding herd is progressing at a much slower rate. The question being asked by everyone – who is going to be the first to quit? Even with cash corn now at $6.50/bu and a large share of the 2008 crop having very wet feet, there doesn’t seem to be anybody coming forth with major liquidation plans.

 

As you think about who will be the one to sell sows, you can come up with some interesting scenarios. Lets begin with the traditional producer, now often having 1-3000 sows. This farrow-finish system owns much of the land associated with it’s pork system, grows the corn it feeds to the pigs and utilizes the manure from the pigs. The decision to sell the sows from this production system rests partially on whether pork production is part of the plan to involve the next generation in the family farm. That is, if the pigs are sold, will there be enough work for the 2 or more family members that rely on the farm for their lively hood. Even with rising input costs, the cost to produce a bushel of corn is thought to be under $4/bu, and every 8 pig spaces in finishing equates to 1+ acre of manure credit. While this operation short term would make more money selling cash corn for $6.50/bu, with cash hogs in the $50 window, they are still successful financially for the overall farming enterprise. This producer isn’t facing the same economic incentive to quit pork production as producers who are buying cash corn at almost $7/bu.

 

Let’s look at that producer. Generally they have several farrowing sites, often with 2-5000 sows per site. Suppose they make the decision to quite pork production. The assets invested in the farrowing sites have a value, and the lender to the producer won’t support leaving the asset idle. The end result is that if the producer decides to quit production, the farrowing site is apt to be sold, often times with inventory, to another producer.

 

Last week I did a walk thru of such a situation – the sow unit is ‘for sale’ and at least 4 different parties have been thru it prior to making a bid for the facility and the female inventory. The net result is that while the production system that currently has the facility reduces its sow inventory, the US inventory doesn’t decrease.

 

Add to this the tremendous value hog manure suddenly has. With anhydrous ammonia near $800/ton, grain farmers are literally lining up for access to manure. Last fall it cost approximately $35/acre to inject manure from finishing facilities within 2 miles of the facility. The current fertilizer value of this injected manure is now above $150/acre.

 

The above scenarios suggest that the decline in pig numbers that will ultimately be necessary to result in an increase in price (supply and demand does work) won’t happen soon. Everyone is waiting for someone else to go first. In the meantime, we are all bleeding to death from $6.50 corn and too many pigs. What a painful death.

2 thoughts on “Who will be the first to quit?

  1. Hey Mike! Looks like I’m the first to blog with you! Once the word gets out, I’m sure that we will see lively dialog on a variety of topics. I’m looking forward to it and hope that other producers are as well.

    From what I’m seeing and hearing, your above comments are right on. Lots of “talk”, but little action in liquidation. Finishing spaces are actually difficult to find.

    Happy blogging!

  2. G’day Mike! As usual, you have a knack of cutting to the chase. Enjoyed reading your blogs and think you are correct in observing that everyone seems to be waiting for someone else “to blink”. The next month or two will be interesting.

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