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DAVID KRUSE

By Staff | Jun 19, 2009

The current losses being absorbed by the hog industry were intended. They were intended to winnow another group of independent hog producers from the industry so the producers left with the most market advantage and access to capital could increase their market share of the industry.

Those implementing this vision intend to have the hog industry structure itself becoming something similar to that of poultry.

It’s not there yet. More independent producers either have to quit or become contract producers for others who will own the hogs. The poultry industry still gets into trouble with supply and demand. The export pullback hurt poultry, too.

The want-to-be-kings poultry companies, like Pilgrims Pride, can overextend themselves, building their empires and falling hard. What has happened, though, is that the poultry industry has concentrated its decision-making process to the point where so few participants control so much of the industry that when there is a collective action by those few, it affects most of the industry’s production.

Poultry exports were damaged by Russian protectionism and the global financial crisis, yet the poultry industry reacted relatively quickly and collectively to moderate production enough to stabilize the market and avoid deeper protracted losses.

The pork industry has been concentrating production with fewer and larger producers but has not yet reached the point where these fewer and larger producers are comfortable about modifying production to mitigate losses. They fear that others would act independently to expand market share, taking advantage of them.

Hog producers were told by industry advisors that the industry needed to liquidate 10 percent to bring supply in line with demand. That was an accurate estimate of what was needed to restore profitability. If all producers had reduced herds by 10 percent, they would be moving through this recession period as well as the poultry industry.

The hog industry is no more socialist than the poultry industry. The poultry industry began colluding with collective market decisions only after concentrating to the point where a handful of producers controlled most of the production.

It’s an oligopoly. The pork industry is not there yet, but it’s heading in that direction. The pork industry was enticed by a period of strong export growth, with expectations that strong exports would continue, thereby soaking up any oversupply.

Exports are like two-sided swords – they cut both ways. Exports are undependable. As we have seen, they can be turned off by government edict overnight and then producers are left with marketing the unexported surplus on the domestic market for whatever price it will bring.

Producers should be cautious about exports. The current situation with soybeans is no different. It’s great that China is buying half of U.S. soybean exports, but that also makes us dependent on China for half of our soybean exports. China bought U.S. pork contributing to that export boom and then helped with the bust slowing pork export demand this year.

The hog industry has lost money 18 of the last 20 months. As equity drains, bankers are now being forced to make decisions. The decision the hog industry has not made is to act for the collective good.

Hog industry individuals are still hoping others would liquidate so that they don’t have too. Eventually such a business plan will shoot the wounded and the survivors can pat themselves on the back. The problem is that it takes all the equity gained from the profit cycle to survive the bust so the hog industry is starting to look like the airline industry instead of the poultry industry.

Certainly the hog market is impacted by feed costs, consumer demand, export markets and the like, but, the bottom line is still determined by production and hog producers stubbornly did not respond to losses determining their fate.

They typically argue that not producing at 110 percent is inefficient. Productivity gains have significantly exceeded the 3.6 percent reduction in breeding animals to date. The hog industry could use a little inefficiency, or a disease like circovirus now and then, if it is to control supply.

One difference in this cycle is that being integrated is not the help that it was in the last cycle trough. In 1998, packers made lots of money from buying cheap hogs, selling pork still in good demand.

In 1998, 8 cent hogs were a windfall to packers. This cycle is seeing packer margins shrink, due to a drop in co-product values and pork exports. This means that being integrated, both producing and processing hogs, is not salvaging the bottom line this time in this cycle.

Talk of the WTO declaring swine flu a pandemic shouldn’t impact the pork market, but probably does.

Over 70 countries now have confirmed cases of H1N1. Australia is the latest hot spot for the virus. Russia was still adding states to its H1N1 pork ban.

Producers who expected to be making money by now, are not, which is generating another wave of liquidation, this one forced.

All this means BLTs should be cheap late this summer.

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.

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