By Kent Bang, Compeer Financial
High market hog harvest numbers have kicked off 2019. In fact, in the first 13 weeks, harvest has been 3.8% higher than a year ago, or an additional 90,000 head per week. This additional pork (190,000 additional carcass pounds per week) continued to put pressure on markets and prices received until recently. Carcass cutout prices fell from $70 in the beginning of the quarter to $60 by the end of February and recovered rapidly on China’s pig price and ASF news to over $80 in March.
Live hog prices have finally recovered to profitable levels in late March, but the first quarter will still show red ink for the live sector. The futures prices for the next year have added impressive gains. The outlook for the next 12 months improved from by $34 per head at one point, then retraced in the final week, but still posted gains of nearly $20 per head for the month.
Profits have been hard to come by since August of 2018 when it became apparent that tariffs would likely include pork products. The wait for some resolution to trade tariffs has been long and painful and is likely to take longer yet. Many producers are rightfully frustrated by the lack of movement with two of our largest trading partners, Mexico and China. Ham prices have been hit hardest, but it has trickled into virtually every pork product we produce. Generally, the U.S. producer has paid the price for the tariffs in reduced product prices and losing some volume in the process.
Many producers are starting to feel the pain in terms of working capital and available credit facilities and need to make some plans to get through this down-turn. I would encourage those who are in question to meet with their lender to determine if they can make some adjustments to give them more working capital by terming out additional real estate or if the operation has grown, giving them a larger line of credit. At any rate, discussing this and making plans early is generally better than waiting until the need is upon you.
When facing tough times, here are a few basics to remember:
Obtaining and maintaining high production levels is obvious. Pigs per sow and percent full-value pigs sold are two key parameters to know how you rank among peers. This will drive your ability to come out of this downturn with earnings.
2. Cost of Production
Knowing how you rank among peers in cost of production should be a key consideration for your lender and for your business and expected return on investment. Costs today in the Corn Belt generally are $64 to $68 per carcass cwt. If you are higher than that (in the Corn Belt), you either need to make that up in revenue relative to peers or figure out how to drive costs down.
3. Risk Management
Risk management has been especially difficult in the rising market, with many uncertainties facing the industry. Stepping in front of a bull market is a difficult decision, and risk premium in the option market has been high, adding to the challenges. On the other hand, laying off some risk at this point makes a lot of sense for those who need the certainty of capturing some of what the market is offering.
4. Capital management
A good knowledge of your income statement and balance sheet and the trends should help you manage your business and the risks associated with it. Having the discussion with your lender about how margin calls will be handled, especially if they exceed credit facilities, or even hold limits for your lender, is a critical one. Are there reasonable steps you could take to structure long-term debt to better suit your needs today? Are there capital spending plans that would best be delayed or reduced until finances improve? These are important questions to ask to make the best business decisions in challenging marketing times.
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