The crystal ball says —
DES MOINES – While John Morrell & Co.’s announcement to permanently close its Sioux City plant by April 20 sent shockwaves through Iowa and the pork industry, the decision is expected to have a negligible impact on hog prices, according to one economist.
“The plant closure has been the big story, but it was completely foreseeable,” said Dr. Steve Meyer, president of Paragon Economics, in Adel, who spoke at the 2010 Iowa Pork Congress in Des Moines.
He noted that the plant was built in 1959, which is relatively old by today’s standards. It has a capacity of 14,000 head per day, although the number of hogs harvested has typically ranged between 10,000 and 11,000 head per day.
The plant, which is primarily a kill-cut facility, has limited processing. In addition, the plant’s location is no longer a positive for Sioux City, especially since the stockyards closed nearly eight years ago.
“One less plant is not the same as one less buyer or one less company,” Meyer said. “Producers still have many selling opportunities in the South Dakota-Minnesota-Iowa-Nebraska area, and Morrell says it will still honor its marketing contracts.”
However, the plant closure will have more of a long-term impact as the pork industry tries to cut back and adapt to the challenging economic environment.
For every 1 million head fewer of market hogs produced in the U.S., there will be 331 fewer jobs in pork production and 681 fewer jobs in pork processing, said Meyer. He noted that high costs in the pork industry continue to drive changes like the closing of the Sioux City Morrell plant.
Ethanol industry drives corn bids
These high costs have been apparent in corn prices, said Meyer, who added that positive ethanol margins would continue to drive corn bids.
Ethanol production capacity remains strong. There are 193 plants in operation, with a capacity of 13.1 billion gallons per year, Meyer said. In addition, 13 plants are either expanding or are under new construction, representing a capacity of 1.4 billion gallons per year.
“We can’t ‘un-ring’ the ethanol bell,” Meyer said. “The bottom line is that the plants are in place, and they will need to be operated by someone. That means we’re not going back to $2 corn any time soon.”
High costs aren’t the only challenge facing the pork industry. Declining meat consumption in the U.S. is also creating an emerging issue for livestock producers, Meyer said. In 2009, pork production dipped 1.8 percent, while beef dropped 2.7 percent, chicken production declined 3.3 percent and turkey production plunged 6 percent, he added.
“While domestic pork demand grew in 2009, the trends since 2004 have been downhill for pork, beef and poultry. I hate to say it, but it will be a real chore to keep demand indexes steady over the next few years.”
Exports have remained a bright spot for the pork industry, however. Thanks to the record low U.S. dollar, 2008 was “nirvana” for U.S. pork exports, Meyer said. In 2009, pork exports stayed remarkably strong, despite the challenges of the H1N1 flu virus and the global economic slowdown.
Currently, stocks of meat in cold storage have fallen sharply, reaching levels that haven’t been seen since 2003, said Meyer, who noted that this is a positive for the pork industry.
How to manage the cost squeeze
Closer to home, strong packer margins in December should support higher hog prices, said Meyer, who added that the futures market offered unprecedented opportunities for a $10 to $15 advantage for many weeks.
He noted that the lean hog futures “carrot” is still available to producers.
In addition to maximizing this opportunity, Meyer said it’s also important to:
- Manage feed ingredient costs. Corn near $3 will be cheap for the next five to eight years. “Ditto for meal under $280 or $290,” Meyer said.
- Integrate backward into grain production. Producers who grow their own grain can have an advantage in controlling costs, Meyer said.
- Carry a “strategic reserve.” Have two to three months of corn to get through August and September. Don’t get in a hurry to buy soy meal, however, since it appears that the South American soybean crop is developing well, Meyer said.
Contact Darcy Dougherty Maulsby by e-mail at email@example.com.
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