At a Crossroads: Where Does the Pork Industry Go Next?

Is the pork industry at a crossroads? Mark Greenwood, chief diversified markets officer at Compeer Financial, admits he doesn’t know. But there’s no doubt, especially after this year, that everyone is thinking about which direction we should go moving forward as an industry.

Big questions hang heavy in the air. Are we too efficient? What is the right number of sows to have in production? Where did all the hogs go this year?

During the Allen D. Leman Swine Conference, Greenwood took a stab at answering some of these hard questions and shared some of his thoughts on what’s ahead.

Is Efficiency a Problem?
As more and more larger pork production systems approach close to or over 30 pigs per sow per year, there’s no question U.S. pork production is highly efficient. But maybe it’s too good?

“When I look at just the overall numbers going forward, we have 6.3 million sows in the U.S. How many do we actually need? My plain and simple answer is not 6.3 million,” Greenwood said.

It’s important to consider what happens to the U.S. pork supply when production continually rises.

“We're getting the pigs harvested. But if you talk to anybody on the processing side, we're not getting further processing done,” he said. “We're still short on labor. On the processing side, we're not extrapolating full value on those pigs.”

The industry has done a marvelous job when it comes to production management, he added. But he challenges producers to think differently about how to improve it going forward.

What Really Happened During COVID?
Greenwood said this is the gray area that no one really knows how to explain. Some people think we will have hogs backed up in the fourth quarter of 2020. But he honestly isn’t sure if that’s accurate or not. He believes the industry will get hogs harvested in the fourth quarter of 2020.

“I also want us to be making sure that we're thinking proactively about what could happen in 2021,” Greenwood said. “I know how this industry reacts. And I know how quickly this industry can react to increasing more pigs. I'm worried about supply as we look forward into 2021, because if all of a sudden, as we look at June and July futures next year over $80, if there's margin there, we're going to save every pig possible.”

Although the U.S. may be OK in terms of supply for the fourth quarter of this year, Greenwood said he’s worried about what the industry might do on the farm going forward into 2021.

“So let's not get overly confident that we have this all figured out,” he said.

Where Have Producers Made Money?
He said producers who have made money in the last few years did it by one of two ways. They either were integrated, or they did a very good job of hedging.

“If we look at 2020, every part of our profit has been through hedge gains. The producers left are doing a very good job of risk management going forward. And they had a lot of coverage through August of this year,” Greenwood said. “I can clearly tell you in the last couple weeks, they've been aggressive again on taking risk management going forward through about April, to minimize some potential losses.”

He also said overall loan borrowings has not moved much since March 1. Revolving lines of credit have stayed at about 36% usage.

“There's a lot of liquidity and a fair amount of staying power going forward,” he said.

Although he thinks the U.S. is very well positioned to keep drawing from their export model, like most things, it comes with some risk. If you're a producer who not integrated, how do you stay successful long term? Greenwood asked. Do you need to get integrated to make sure you can be viable long term?

“Understand cutout is around $80. The cash market today is at $60. We're sitting at 70% cash to cutout,” Greenwood said. “You cannot survive on that big of a gap. I'm probably not making everybody happy on this one, but I can clearly tell you if you're selling on a negotiated net price market, that is not a sustainable model as we look forward.”

Where Do We Go From Here?
The pork industry has some work to do from a consumer perception standpoint. A recent National Pork Board study showed that the pork industry has an opportunity to make improvements in how consumers view their product from a health and nutrition standpoint.

“When we look at where customers view us, we're getting our butts kicked, plain and simple. And I think if we continue to focus on operational efficiencies and making sure we produce as many pounds of pork as we possibly can, we're going to have a problem,” Greenwood said.

During COVID, the industry has been focused on one thing, he said. Production. In addition, it has focused on throughput.

“We weren't nimble enough. I understand it's a fresh product, but we did get exposed,” Greenwood said. “I think if you're more coordinated, it should give you the ability to be more agile in addressing supply.”

Will the nation’s food chain get disrupted again this winter? Greenwood said it’s possible.

“If we haven't learned some things about what we need to do to make sure that this doesn't happen again, we've missed an opportunity. I think that's the point that I want all of us to think about as we go forward,” he said.

COVID has given the industry a glimpse, albeit a very small glimpse, of what a foreign animal disease like African swine fever (ASF) could do to the U.S. pork industry.

“I can tell you from a lender's perspective, if we got ASF here, it would be ugly. We have to be more diligent than ever to make sure we do not let that disease get into this country, because it will materially change the industry,” Greenwood said.

Communication is key. It’s time to have those hard discussions. Whether it’s ASF or COVID, we can’t say it’s not my problem anymore, he said.

"If I can get the industry to do one thing...do more of what the late Bob Morrison would do for the industry,” Greenwood said. “Ask questions, and listen before you act. We need that more than ever as I look at the pork industry going forward."

At a Crossroads: Where Does the Pork Industry Go Next?

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