Oversupply and higher input costs push hog producer operations back into the red

Trends in higher pork market prices and lower input costs have both reversed in recent months, leaving pork producers around the country suddenly having to spend more to raise their product than they can get for it at the sale barn.

According to the U.S. Department of Agriculture's Economic Research Service, first-quarter hog prices for 2008 are expected to average $38 to $40 per hundredweight, more than 15 percent below a year ago.

At the same time "with costs of producing slaughter-ready hogs estimated in the low-to-mid $50's per hundredweight, most hog producers are likely to operate in the red in 2008," the ERS outlook report says.

Several conditions have converged on the pork industry at once to create this high cost-low demand imbalance, led by the ethanol-induced doubling of feed prices. Along with that come some of the usual suspects such as higher fuel costs and the intentional increases of sow herd sizes during better times in recent years. But even a highly successful vaccine is adding to the oversupply situation this year.

Systemic shock

"By far and away, it's been the feed piece that has really been a shock to the cost system," says Dave Preisler, executive director of the Minnesota Pork Producer's Association. "Depending on location, there are some areas of the state that just plain will run short of corn, and so it's going to increase the cost of (trucking) corn into certain areas for both feed and ethanol."

The National Pork Producer Council has stood against the 51-cent-per-gallon blender credit the federal government pays to ethanol producers. The new farm bill reduces that incentive to 45 cents, which may help slow the corn ethanol boom in coming years.

Meantime, many pork producers have made adjustments, seeking dried distiller's grains from the refineries as a partial feed replacement.

"Of course, in general, those will tend to be priced along with corn," Preisler says. "They are economical to use right now, but they have also gone up in value as corn has gone up."

DDGs have been used successfully in sow gestation diets and the finishing phase, typically at no more than 10 percent of the total diet. But the higher feed cost has changed that.

"We've done a lot of work trying to push that envelope just about as far as we can," he says. "There are some people that are moving that level up, though it would be very rare to find someone that would be over 20 percent."

Pushing that number, though, tends to soften the animal fat at slaughter.

"It affects the actual quality of the fat itself," he says. "Specifically in the belly where you would get bacon . . . that fat becomes very soft, and so it is difficult to slice, and it also is difficult for the consumer."

The issue still is being explored, and Preisler says some producers feed their hogs more than 20 percent DDG content right up until a few weeks before slaughter and then remove the DDGs from their diet altogether in hopes of restoring the fat quality.

Adding to producer's input woes is the constantly climbing cost of fuels, be it gasoline, diesel or heating fuels.

With $4.30 diesel fuel, observes Jeremy Lehrman, executive director of the South Dakota Pork Producers Council, hauling the feed to the farm, spreading the manure out onto the crop soils and transporting pigs to the processing plant all are more expensive.

Preisler notes that the rising cost of heating barns during the winter also is adding to their problems, though he considers it minor in comparison to the real issue.

"There have been increased costs in that area, but by far and away, our largest increase in cost has been feed. All the other costs are relatively minor increases in comparison to what's happened with feed."

Market glut

Pork producers have had a couple good years just before 2008. Retail prices were on the rise, and many producers were pulling in record profits.

"We did the same thing everybody does when they're making money," Lehrman says. "We tried to make more money."

Producers were increasing sow herds sizes at the same time a new vaccine for porcine circovirus was beginning to impact pork operations. Circovirus had been claiming as much as 10 percent mortality of hog herds, and herds vaccinated with Intervet's Circumvent demonstrated "significant reductions in mortality, dramatically increased growth rate during finishing and fewer lightweight market hogs," according to published results of a 2007 to '08 Kansas State University study.

So in relatively short order, more sows were farrowing, more of her pigs were reaching the market and they were getting there at higher weights. Market supply quickly swelled beyond demand, and producer prices plummeted.

"All of a sudden, we're seeing 5 (percent) to 8 percent higher kills a week than we were a year ago, and we just can't move that much product," Lehrman says.

Meanwhile, retail pork prices moved up moderately in 2007, with a similar rise expected in 2008, according to the ERS study.

"The demand for pork is excellent," Preisler says. "It's very good, and so actually, our hog prices are some of the better prices that we've seen in years."

But the study also says that the farm-to-retail price spread widened last year, with most of the increase going to the wholesale-to-retail component of the supply chain.

"Larger-than-expected hog slaughter in January prompted USDA to raise its forecast for 2008 commercial pork production to 23 billion pounds, 5 percent above last year's production," it says.

Thus far in 2008, hundredweight pork prices have hovered just below $40. Producers, operating in the red, often losing $30 to $50 a head, are taking steps, including getting their pigs to market sooner.

"Market weights are down, now, compared to where they were a month ago or a year ago," Preisler says. "They've been down roughly 5 pounds a pig."

This has two advantages, he says: "One is that you're using less feed, but the other is that it's putting fewer pounds of pork on the market.

Liquidation, another common and effective method to cancel market oversupply, also is taking place on hog farms all over the United States.

According to Lehrman, "An individual might have to go from having 2,500 sows to having 2,000 sows to balance it out and get the demand back where it needs to be."

The impact should start to be more apparent in market prices this fall, he says, pointing out that prices are edging upward a little right now.

"I would say the consumers would start seeing that this fall or towards the end of the third, into the fourth quarter."

The ERS study projects commercial pork production to slip to 22.9 billion pounds next year, 2.4 percent below this year's production forecast.

"Lower hog supplies next year should result in prices ranging between $46 and $50 per hundredweight for live equivalent 51 (percent) to 52 percent hogs, more than 9 percent above expected prices in 2008," it says.

Until then, a crisis that already has cost the pork industry more than $2.1 billion in just seven months will continue, by all accounts.

On the upside

In response, the National Pork Producers Council urged Secretary of Agriculture Ed Schafer to take action, and on May 1, USDA announced its intent to purchase up to $50 million of pork products, which will be donated to child nutrition and other domestic food assistance programs.

"It's certainly a move that was appreciated, and it's something that we worked with our congressional offices to ask USDA to actually do that," Preisler says. "It's good for people that utilize these programs, whether it's food shelves or food assistance programs, because pork is a good buy and a lot of those places are in hardship, too."

But from a market value standpoint, $50 million will have little direct impact on a multibillion-dollar industry.

"I think a part of it is psychological," he reasons. "Any little bit helps to pull product through the system, and so, by doing that, it certainly helps."

He adds that the NPPC is talking with USDA about doing another buyout in the fall.

"That looks good at this point, too," he says.

Also, there is one item in any pork operation that is both increasing in value and outstripping demand -- manure. Fertilizer costs have been flying high, right along with grain prices, and grain producers are eager for alternatives.

"The value of manure is tremendous as a replacement for commercial fertilizer," Preisler says. "In fact, that's the other thing that we see here in southern Minnesota is that there is far more demand for manure for crop producers than there is supply. Far more."

Finally, streamlining operations can help recover a portion of producer costs. The Minnesota Pork Board has posted several helpful documents on its Web site ( www.mnpork.com ), including risk management strategies and a to-do list of tasks that can trim the fat off the operations budget.

"We've been working a lot on trying to provide risk management tools for producers, and we're going to continue to do that," Preisler says. "For those that haven't been doing that, it's certainly going to be one of the necessities going forward when we're in this kind of a volatile marketplace."