Profitability is on the minds of pork producers

By Jennifer Bremer

Profitability is what keeps all businesses going and it is no different for the hog industry.

Pork producers have seen their share of profitability challenges through the years and the current issues of high input costs and lower market prices have affected their business.

National Pork Producers Council economist Steve Meyer expects the average pork producers to be in the red for the remainder of 2008.

"We have seen the high for hog prices this year. We will continue to see large slaughter numbers for the rest of the year, which will cause a push on profitability," he said.

Good decisions

Iowa Pork Producers Association President Dave Moody said producers are at the point where they need to make decisions on improvements in their operation and production costs. These decisions may lead to more producers deciding to not continue in the pork industry.

"Lower hog markets are one thing, but we're definitely in a new era on input costs and where feed grain prices are and so forth," Moody said. "That's definitely going to be a challenge for us."

He said the best thing for producers right now is to raise their own feed, since feed costs have risen so much. He manages a 600-sow farm in Story County and has a finisher unit in Hardin County where he contract-finishes 12,000 hogs per year.

It is more economical for them to feed grain they raise, thus making them more profitable in the end. "A lot of producers don't raise their feed, which makes profitability very challenging for them with high grain prices," he added.

Meyer suggests hog producers who don't raise their own feed should buy corn now when it is under $6 per bushel. It could get to $7 or $8 per bushel in the future, which would push some producers out of business.

Moody said that ethanol has been blamed for a lot of the rise in feed costs, but he believes there is a lot more to the rise in prices than just ethanol. A grain shortage around the world has more likely been a major cause for the rise in prices, in his opinion.

"We are happy with our free market and not all the government regulations. It helps keep things fair and even, across the board," he said.

Meyer said it is not only about maximizing profitability, but also about minimizing losses--which may be the same thing, just looked at differently.

Managerial changes

Moody said he doesn't plan to make any major managerial changes in the operation in the future, but is concerned for other producers who need to invest in facilities or improvements.

"Producers who need to spend money on facilities may not have the funds to do so and they may be forced out of business," he said. "We will continue to see the industry moving to more specialized production. For instance, the sow herd I manage raises gilts for DanBred and then finishes out all the barrows.

"It would definitely be harder if we didn't raise our own feed and didn't have a bonus market for our gilts."

He said some of their customers who get gilts from them are changing management decisions based on profitability.

"Our customers are holding in there, but some have been taking fewer gilts," said Moody.

With producers now seeing lower hog prices and escalating feed costs, Moody assumed the IPPA leadership role of the nation's top pork producing state at a difficult time.

"From an economic standpoint, there will definitely be some challenges this year," Moody said. "But I'm looking forward to the challenge and excited about the opportunity."

Demand and market prices

According to University of Missouri livestock economist Glenn Grimes, April 2008 retail food prices were up the most in 18 years. However, pork prices contributed to little of the increase. Pork prices in April were up only 1.6 percent from a year earlier.

"The sharply higher prices are still in the future for pork, but they will eventually show substantial gains in price," he said.

The average price of retail pork for January to April was up 1.2 percent from 12 months earlier.

"The entire market system benefited from the higher retail prices. The total pork marketing margin was up 7.4 percent; the processor-retailer margin was also up 7.4 percent; and the packers' margin was up 7.5 percent from a year earlier," he added.

Meyer said the continual high demand for pork has been the factor to keep prices up. "Demand along with a tremendous year for exports has helped keep the prices up even at a time for high slaughter numbers," he added.

Meyer expects hog prices to be in the $60 to $64 per cwt. range for the third quarter and $55 to $58 per cwt. range for the fourth quarter--a time that is always critical for pork producers.

"The cash market continues to be substantially lower than the futures market, so it would be advantageous for producers to think about selling their hogs on the futures market before prices decline," he said.

Grimes said odds appear high that hog producers have slowed down on their decline in the breeding herd.

"With hog prices at a level to produce profit for the average-cost producers along with the futures market for the next year, there are signals that reductions are not necessary. We doubt this is the situation we really have," he said.

Sow slaughter for the week ending May 3 was up about 1 percent from a year earlier, following four weeks with sow slaughter up over 15 percent. Sow slaughter for the week ending May 10 was 10 percent above a year earlier.

High input costs, low market prices, export markets, consumer demand and the changing farm economy are all contributions to profitability on the farm. Time will tell how hog producers will manage to survive in the future--whether it is by specializing their business, contract-feeding hogs, raising their own feed or managing their input costs more effectively.

"Production efficiency is needed. Producers may get to the point when they need to make decisions and, even if they are hard decisions, they have to stay profitable," Moody concluded.

Jennifer Bremer can be reached by phone at 515-833-2120 or by e-mail at jbremermaj@hotmail.com.

6/16/08
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Date: 6/13/08

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