Tuesday, July 15, 2008

Happy talk...

It is hard not to notice a definite change in tone for some hog industry analysts. Consider one of the best, Chris Hurt at Purdue. This is last March:
Most pork producers who take the market risk are in the midst of another financial disaster. The North American industry remains on pace to suffer the most damaging financial year ever due to a period of twin horrors. They face a period of excessive pork production while also battling feed price escalation of historic proportions. There seemingly is no cure until the financial carnage is sufficient to decisively reduce the size of the breeding herd. [More]
Now contrast with this from Chris just last week:
Pork is cheap in the U.S., but it is “dirt cheap” for many of our foreign buyers since the strength of their currencies effectively lowers the price even more. Pork is at bargain basement prices when you realize that U.S. producers are producing and selling hogs at huge losses. In essence, U.S. producers are providing huge subsidies to U.S. and foreign consumers. Why wouldn’t the world’s pork buyers be banging at our door for these bargains? Why would foreign pork producers want to try to compete with U.S. producers? All this indicates that U.S. pork prices will explode to the upside like other commodities have done. The question is when?


So when does the boom in pork and hog prices come? Based on projections of U.S. slaughter supplies, prices will improve very late this fall and winter and go wildly higher by next spring and summer. When one adds the trade boom, this advances the price escalation. Trade data lags about two months so we are always slow to see those impacts. Trade will likely continue to accelerate and this will encourage even stronger prices than the supply reductions expected for late this year and 2009.

The movement upward has begun for cattle, where prices have been up nearly $10 per hundredweight in the last three weeks. Given the coming declines in pork supply and the more than vigorous export growth, hog prices should not be far behind. If U.S. consumers don’t want to buy up the last of the cheap pork, the world is anxious for the opportunity.

The issue for individual pork producers is whether they can hang on long enough for hog prices to catch up with costs. Expectations now are for live hog prices to trade in the lower-to-mid $50s for this summer and fall then move into the low $60s by winter and on to the higher $60 to mid $70 by next spring and summer. Given prices of corn and soybean meal on July 7, costs of production for farrow-to-finish producers is estimated to be in the low $60s.

The extraordinary losses of 2008 may be offset by extraordinary profits in the last-half of 2009 and 2010. This will especially be true if CRP land is released in 2009, if ethanol receives less support, if 2009 weather is favorable, and if crude oil prices don’t keep moving higher. There are still plenty of uncertainties and most won’t feel relieved about “better times” until they arrive. [More]
Nor is Chris alone in his surprisingly upbeat outlook for hog farmers currently bleeding red ink. These guys know what they are doing, so why they relatively sudden optimism? Especially when you consider the prices for corn/meal in March versus last week.

Some guesses on my part:
  • Analysts truly see a recovery led by exports. Forecasts change, and expecting monthly outlooks to be written in stone is unreasonable. Still, hog producers are in the middle of the swamp - not finding firm ground. While forecasts of happy days may be right, and they are laden with caveats, the change in tone strikes me as notable, if nothing else.
  • The dollar can't find a bottom, so exports could continue to expand and support prices. Just when we think we have a grip on the credit crisis, another bank/investment house/mortgage company raises its hand to share with the class. A sinking dollar is keeping US pork in the driver's seat for world pork prices.
  • Other countries are doing the liquidation for us. On Friday in Denmark, a major pork production country, their "hogs and pigs" report showed a 14% drop year-to-year in hog numbers. It was a big surprise, but confirmed what feed compounders already feared: hog producers were folding up shop big time in DK.
It is also possible that commenters with the horsepower of Chris Hurt are more sensitive to tone and nuance in their communications than ever. Instead of speaking of "horrors" [March] he alludes to better times if you can hang on. A demoralized industry may need this type of encouragement.

But who really needs it are demoralized lenders. Ag lenders have been largely spared the carnage of the rest of their industry, and I bet more than a few boards want to keep it that way. Although institutions panic with a little more gravity than individuals, I suspect many are on the verge of pulling the plug not only on operations operating underwater, but those who still haven't burned through their equity. I don't doubt Chris's words were printed out and taken to loan offices around the country.

Just as grain analysts carefully reassured a hyperventilating grain market after the last crop report, it is not impossible that even the most impartial experts are sensing a need to calm everybody down, and avoid speculation on what an early frost would mean, for example.

This neither duplicitous nor irresponsible. However, it carries larger than normal risks for Chris and others in his profession. Hog producers who do choose to hold on are unloading equity with every truck to the market, and hanging on slows the necessary liquidation.

I don't know where the greater good is served, and I think analysts of note do need to think carefully before speaking or writing. But they are struggling as are we all with the limitations of our forecasting abilities. When you are in new market territory, with new rules and much larger numbers this adventure in agriculture is more likely to be accomplished by trial and error in the dark.

What I am not suggesting is "spin" by Chris and his colleagues. But just as Sec. Paulson and Chmn. Bernanke are trying to calm troubled waters with "jawboning" I see hints that concerned leaders in agriculture are hoping to do the same. I just don't think it will be very effective.

As a culture we are more cynical than ever, and alert to shifts in emphasis. I am an example of parsing reports word-by-word to uncover subtext. Helpful or not, it is a fact of modern communications. At the same time, information flows in cataracts around us, instead of proceeding by the "mouths of elders" (or Cabinet officers, for that matter).

The power of prediction to aid may be one casualty of modern communications.


Anonymous said...

Possibly your best all-time post. Thanks

Chaz said...

Great post and analysis of Chris Hurt's commentary, John.
My question is this: do you think we'll see a shift to hog producers owning (more) of their grain production in the future? It seems to me that they've made themselves very vulnerable to run-ups in grain prices. The corporate guys built their competitive advantage on squeezing more efficiency out of the hogs, but what about the feed? If we're in for a long period of high-priced grain, what then?
Is everything old truly new again, where we'll see some form of farmer-feeders?

John Phipps said...


Actually, one odd thought I had was a nearby grain producer funneling some grain profits to a flailing hog operation to get some ownership and MANURE! (I just priced MAP for fall)

The main obstacle in this whole mess is the vertical integration that essentially bases all the finances on the contracting entity (I'm thinking of finishers who only have building and labor inputs). I gotta believe some if not most of these contractors could be bought out at a steep discount and then the new owners re-contract with the finishers.

But I'm really speculating here. After I've made some calls I'll post some possible outcomes.

Thanks for reading.