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DAVID KRUSE

By Staff | Aug 28, 2009

The National Pork Producers Council says that the hog industry has lost $4.5 billion, half its equity, since September 2007, equaling $21/hog. That’s the plan coming together, or is it?

The grand plan was for the major integrated producers to maintain production, forcing the less capitalized, less integrated smaller producers from the industry so that the major players could expand their market share and profit from the post liquidation market rebound that would occur.

Major producers fully intended as they had done in previous cycles to use the financial washout to concentrate the industry further.

This plan was not put together, nor was it being implemented by what you would describe as “nice guys.” They are driven by greed to covet control of an industry. They were essentially betting a few billion dollars that they can put others out of business to reap the perceived rewards. Their plan has encountered problems.

One problem is that previous cycles had weeded out the weakest players. Industry equity was much more evenly distributed than in previous cycles. A few producers have failed financially, but they don’t make up a significant portion of the production and productivity gains quickly offset the smaller reduction in sow numbers.

Another problem is that while the hog industry is tough to enter, it is also tough to exit. Once in, producers are tied into production by capital and contract commitments that require maintaining production. They can’t or won’t make the choice to moderate production until forced to by bankers who shut off lending and call in loans. In other words, the only way production is modified is when producers literally run out of equity and go broke.

Dr. Glen Grimes says the sow herd is 10 percent too large relative to demand. When market losses hit, poultry integrators modified production. Beef reduced numbers on feed in response to losses.

Pork demand has contracted. The hog market clearly and loudly has been telling hog producers to modify production. Yet producers have turned a deaf ear because they would first have to modify their contract structure and second, because some players still think they have $1 more equity than their neighbor who will have to quit first.

Greed has gotten the hog industry into big, big trouble, going beyond the point of a happy ending. They can blame it on circovirus vaccine boosting breeding herd productivity. They can blame it on ethanol and corn prices. They can blame it on China buying up soybeans raising soymeal costs, while not buying U.S. pork. They can blame it on H1N1 or the global economic recession contracting exports.

To one degree or another, all the excuses are real, but their primary problem is their failure to respond to negative demand signals modifying supply.

If all hog producers cut sow herds 10 percent, (a few have, but not enough) they would not fill all the finishing buildings and per head costs would increase . . . but supply would be reduced enough the market improvement would more than cover those costs and instead of losing money, they would be selling at a profit.

The industry would be billions of dollars ahead of where it is now. While the industry has stubbornly refused to reduce production, the NPPC is now asking the USDA to buy another $150 million in pork through government programs.

Isn’t that socialism? Government is intervening in the free market system to give pork to those who have done nothing to earn it and help the weak producers in the hog industry who may then not go broke, screwing up the “Grand Plan.”

The major players want weak ones to fail, so government aid only draws the process out. It would cost taxpayers less to just let hog and pork prices fall to see who is going to go broke more quickly.

The Canadian government is buying out some of its hog producers, but is loaning money to others who want to stay in business. That’s not fair either.

U.S. producers expected Canadian producers to go broke first and subsidies/loans may keep many Canadian producers in business. The worst thing that could possibly happen to the plan is if producers had such equal equity that they all produce until they go broke, together.

It would be like a group of drowning swimmers thrashing about until they weaken, and clinging to each other, pull everyone under together. I’d say that some of these guys are arrogant and stubborn enough that they deserve the loss, but most hog producers don’t have a grand design to control the industry and just want to raise hogs and make a living.

It won’t do the corn and soybean markets any good if one of its best customers collapses, imploding feed demand.

The NPPC is doing a lousy job of managing its industry. They have been told by enough reliable economists exactly what they needed to do for what was in the industry’s best interest, but have not responded.

Some industry leaders have announced herd reductions, but liquidation to date has been too superficial to match reduced supply with demand. But other major players have lost so much by now that they want to see it played out.

The NPPC has not lent enough effort to facilitating a general herd liquidation or overhaul the industry’s contract structure key to its inability to moderate production.

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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