It’s showtime again with states across the country hosting annual meetings and swine trade shows. As any vendor can tell you, this time of year can be taxing traveling across the Midwest attending each state show and talking to producers. The travel is worthwhile, however, as it gives me an opportunity to get a pulse on what is happening in the industry and confirm what I am seeing and hearing. It’s also a great time to talk to the various vendors on the front line about new opportunities and technologies that will shape the swine industry going forward.
Two Industry Takeaways
Two themes have emerged during my travels as key takeaways this year. The first is continued improvement by producers. Producers are looking for new and improved technologies to enhance their operations. Over the past few years, we’ve made improvements to sow feeding systems and the supporting technology to track sow feed usage. With the evolution of pen gestation, equipment companies are continually redefining how sows are housed and fed. This leaves more time for employees to tend to what is most important: monitoring the sows and pigs in facilities.
The second theme I’ve noticed is the lack of new projects slated for 2023. This doesn’t surprise me as profitability in the industry remains lackluster. Stagnant growth in the sow herd leaves little opportunity or interest to build new contract grower barns. Don’t get me wrong, there is still some building going on as operations will always look for ways to grow. Part of the decision-making process is knowing when to replace worn-out assets or upgrade with improved technologies. There are other reasons why projects are being put on hold, including the sheer cost of construction and a rising interest rate environment.
Why Don’t Producers Want to Expand?
So, what is the driver behind the economics of producers not wanting to expand? In my 26-year career at Compeer, we have seen times where growth was stagnant but it typically follows a severe economic downturn in the industry. Looking at the profitability of the industry over the past four years, we have seen, on average, modest profitability. This would usually garner more discussion of new projects for the coming year. However, when we look at the dynamics involved, it is understandable producers are reluctant to grow their businesses.
First, sow numbers have fallen by 4% over the past three years. This would lead you to believe expansion would be inevitable. When looking at all the variables, however, it seems there is a perfect storm building to dissuade anyone from taking on additional risk in the swine industry. Since 2019, the cost of production has risen from the upper $60’s/cwt. to upper $90/cwt. 2022 appears to have been mildly profitable and there were opportunities to hedge some profits in 2023, but nothing that would persuade someone to expand.
Additionally, construction costs increased by an astounding 35% over that same timeframe. This, along with the doubling of interest rates, put most producers on the sidelines. Finally, profits have gone back into maintaining the increased costs of inventories. In previous years, producers who made money had additional capacity to either upgrade their facilities or grow their business. That’s just not the case anymore.
Growth in building finish barns remains suspect as well. As of Dec. 1, 2022, the Hogs and Pigs Report shows 67 million head of market hogs in inventory compared to 70.9 million on Dec. 1, 2019. This is down by 5.5%. Some of the 2019 growth was due to a backup on hogs when plants shut down during the COVID-19 pandemic. When looking at the sow herd over the same timeframe, sow numbers are down by 4%. This, coupled with an increase in productivity of 1.2% over that time, makes it safe to assume we have 2.8% of total empty finish barn capacity today associated with a decrease in the sow herd. In reality, there continues to be attrition as older sites will continue to be replaced so the amount of available spaces is most likely less than 2.8%.
What Does This Mean for the Future?
The point is, based on peak inventory numbers without the backup of inventory in 2019, we are excess finish spaces in the U.S. That equates to approximately 1.4 million finish spaces of capacity that are either not being used, were taken out of production or have less double stocking of existing facilities. Either way, other than making improvements to your facilities, there is little incentive to build new finish barns now.
Inevitably producers and contract growers will continue to build new farms to replace existing worn-out assets or to take advantage of opportunities. However, the decision will hinge more on location and the cash flow requirements of the facility going forward and less on being aggressive and looking for opportunities to expand.
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