×
×
homepage logo

DAVID KRUSE

By Staff | Mar 13, 2009

Nobody is making money in the hog business. Production is not profitable and even integrated producers are losing money from packing and processing operations.

Pork demand destruction has been occurring at a faster pace than herds have been reduced, falling behind the curve.

Integrated producers were planning on enough independent producers quitting during this hog cycle to reduce the herd so that they didn’t have to, but there are too few independent producers left in the industry to quit to make a difference.

Losses forced producer-owned packer Meadowbrook to close that plant in Illinois, but those hogs will go to other plants. Producers are hoping to tough it out through spring, hoping to work through any supply backed up by the winter, reaching smaller numbers promised in the hog report. In the meantime, equity continues to drain.

Smithfield Foods sold its beef division to JBS-Swift in order to raise cash to make it through this cycle as an integrated hog producer.

The U.S. industry has fought liquidation hard, hoping others such as Canadians would cut herd size so that they didn’t have to. Canadians did cut their sow herd 7 percent, but productivity gains dilute the impact of sow liquidation on supply.

Smithfield Foods announced that it was closing six processing plants. One reason for this is that branded products are having a hard time competing in the meat case with generic items as price premiums are difficult to get from the market in such a bleak economic situation as today’s.

These were value-added processing plants adding to the core business. If they are not profitable, then they are a liability. Another problem Smithfield has to deal with is cash flow. They needed the money they got from the beef division sale to reduce debt and closing plants that are not critical to their core enterprise reduces company cash requirements. Downsizing this way doesn’t impact how many hogs they raise or slaughter, but it does reduce operating credit needs, $55 million in 2010 and $125 million in 2011.

Smithfield is working closely with lenders with the reorganization of the company positively impacting lending covenants. CEO Larry Pope said, “These amendments are very positive developments, for they provide the company with sufficient time and financial flexibility to bridge the current hog cycle and uncertain economic environment. This action should remove any question about the financial strength of Smithfield Foods.

Bridging the current hog cycle trough is what this is all about. It’s called being the “last man standing.” That is not easily accomplished when you have an industry of integrated players who intend to raise hogs until their cash runs out, only liquidating when they are broke. Strength in pork exports kept the wolf outside the door of the U.S. pork industry, compensating for deteriorating domestic demand. At best, the export outlook is now extremely guarded.

Japan is our best customer and GDP falling over 12 percent last quarter will negatively impact everything sold to Japan including pork.

The hog industry blames ethanol for its problems when it’s overproduction and their unwillingness to respond to it that is threatening the industry. Smithfield’s has girded its loins with restructuring and lending covenants ready now to battle to the end.

Smithfield’s CEO may have thought that after the structuring nobody could question the company’s financial strength, but the market differed, falling 9 percent on the announcement. The problem yet to be solved is that Smithfield and everyone else in the hog/pork industry are losing money.

Smithfield produces and slaughters 420,000 head of hogs a day. Hedgers Edge calculated the packers are losing over $10 per head. Smithfield is losing that much more again from production.

Liquidation of sow herds to date have not yet seen hog numbers fall because of the lag in the production cycle. Tough winters always back up some marketing as the integrated supply chain is slowed by weather. Market weights climbed 4 pounds from August. Fewer Canadian hogs are coming to the U.S., but they are still up in Canada and will compete for pork markets.

Pork is not selling at a high enough price to cover the cost of producing hogs and processing pork. Pork has sold as well as it has because of strong exports and there are many reasons to believe that export sales could cool off considerably.

Smithfield Foods stock traders may be puzzled as to why a company or industry that is losing money in a commodity market driven by supply and demand doesn’t cut production to accommodate weak demand. There was no suggestion from CEO Pope of them doing that. Some of those who sold Smithfield Food’s stock think this “last man standing, continue to raise hogs until the equity is all gone” business plan, is “nuts.”

I’m sorry, but I’m disappointed with the hog industry. Greed keeps the integrators from responding correctly to supply/demand signals and then they blame their losses on the ethanol industry instead of themselves.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page