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Pork Powerhouses 2014: Record Profits Trigger Expansion

Hogs made history this summer. Pork producer profits were, quite simply, enormous -- averaging $82 profit for each hog marketed in the third quarter. “I’ve never seen anything like it,” says Chris Hurt, agricultural economist at Purdue University. “Producers are paying down debt and banks are smiling ear to ear.”

Right: (Pregnant sows are housed in pens rather than crates at this Smithfield Foods farm in North Carolina.)

Unfortunately, the big reason hog supplies are tight is the single biggest topic of concern and interest for producers. Porcine epidemic diarrhea virus (PEDV) has hammered the industry. Cooler weather brings on the largest outbreaks with this deadly coronavirus, so everyone is sitting on (hypodermic) needles as winter approaches.

Big questions loom. Will producers try to compensate for a disease outbreak this winter and 5% death loss in baby pigs by farrowing more sows? What if the virus sleeps all winter?

“There is a lot of uncertainty, and uncertainty usually causes people to be cautious,” says Hurt. “But these are entrepreneurs and they grab ahold and go. They could over-farrow.”

Growth of 3% over last year

Sow numbers collected in the 2014 Pork Powerhouses ranking of the largest 25 U.S. producers, published annually by Successful Farming and now in its 20th year, show that expansion of the sow herd is fairly consistent with USDA reports.

About 3.3 million sows are owned or managed by the largest 25 pork producers in the U.S. (download the Pork Powerhouses 2014 ranking below). That’s approximately a 3% gain over one year ago.

Three-quarters of these largest pork companies, 19 of 25, added sows in 2014. They did this by purchasing existing farms, building new sow farms, increasing the sow density in existing farms, or revamping sow farms that had been sitting empty. All in all, 70,000 of the added sows, or 52%, were new to the industry.

Top of the ranking

Smithfield Foods, owned by the Chinese-based company WH Group (was Shuanghui International), added 19,000 U.S. sows in the past year, about half from acquisition and half from adding sows back to farms that had been mothballed. Joe Szaloky, vice president of business development and planning for Smithfield, is confident about profit during the next year, but “concerned 2016 could be “problematic” if the industry expands too fast.

The company was hit hard with PEDV. In North Carolina, the disease broke in long, continuous waves last winter and spring. “That was very stressful for our employees,” says Szaloky. In Missouri, the virus hit 65,000 sows in 10 days. In Utah, the disease broke for the first time last month.

For growers with finishing barns, there was more down time over the summer thanks to PEDV. Some got fewer pigs than normal and some went 30 days without pigs (they still got paid). The upside to the disease: Sow farms are as clean as many homes today.

Producers anticipate losses from PEDV will not be as high this fall and winter because of immunity in the sow herd. There are two vaccines available, and producers who have used them say they are partially effective at helping chronic farms boost immunity to get a farm over the edge and clean up. The vaccines don’t prevent a break, say farmers, but will help a chronic farm get over the edge.

“I’m fearing what cooler temps might bring,” says Zack McCullen at Prestage Farms in Clinton, North Carolina. “We have all our people on high alert. If we have breaks or re-breaks, I’m hopeful it won’t be as bad because about 90% of the sow herd in North Carolina has had it.”

What are the first signs of trouble? Sows go off feed, says McCullen. Within hours, they are throwing up. “After that it’s a time bomb. Little pigs get diarrhea and die.” You have to be extremely clean to break the virus cycle, he says. “PED moves so fast and is so devastating, I’d just as soon not deal with that again.”

Jimmy Pollock at J.C. Howard Farms in Deep Run, North Carolina, doesn’t want a second hit of PEDV this winter. He’s heightened biosecurity and added dedicated trailers for each farm. He also enforces no farm visitors and has extended the isolation time for gilts. “It doesn’t take but a small amount of the virus to cause an explosion,” says Pollock. “Is it coming from wildlife, birds, air, wind -- who knows? It’s a little bit of a mystery.”

In Guymon, Oklahoma, Mike Brandherm at Hitch says they had a milder version of the disease, but “it took most of winter to push it out the door.” He’s wondering if the sow immunity will hold on. “We’ll cross our fingers this winter that biosecurity is tight and immunity holds up. Once the virus gets in it goes everywhere fast. We are focused on firewalls in between farms. Getting it in one farm is bad. Getting it in five is a wreck.”

Weights climb

The PED virus trimmed supply, but higher market weights helped compensate. Hog counts are down 5% so far this year due to disease, says Hurt, but live weights are up 3%, so pork supply is only down about 2%. Pork producers lost pigs, but gained more capacity in finishing buildings, so they kept pigs on feed longer, added more weight.

Packers got a taste of really big hogs and they really liked them. Many of the largest farms averaged 295 pounds market weights, which means there were a lot of hogs over 300 pounds. Finishing barns had fewer pigs due to disease, so pigs got heavier. Improved genetics allows the pigs to stay lean. Some companies are building new finishing barns to raise weights -- not add pigs, just bump weight up.

Group housing

Group housing continues to be an issue for the Pork Powerhouses. Some retailers have promised to only sell pork from farms using group housing by 2017. Smithfield and Cargill will have made the conversion by then. Hormel and Hatfield have also announced plans to switch to group housing in future years, but many large producers are fighting the conversion, or at least silent on the issue.

Converting to group sow housing gave Smithfield a chance to revamp and recapitalize old farms in North Carolina. Tearing out old equipment and putting in brand new was money that was going to have to be spent anyway.

Not everyone smiling

Although profits are high for the industry as a whole, some producers hedged hogs to their disadvantage earlier this year. They were looking at margins they hadn’t seen in years and couldn’t imagine those margins were half of what was to come in a few months.

The question now is what are companies going to do with piles of cash? Plow it back into the business? The economics of the business means it’s ripe for expansion, says Hurt.

Corn and soybean meal, the basis of the pig diet, are in a low price parade. There are no shortages of grain in the world, says Hurt. “We are now in the Animal Era of 2014 to 2017. The Grain Era was 2006 to 2013. With $4 corn you can produce more meat and have moderate consumer prices.”

He projects hog profits in the 4th quarter of 2014 to be $62 per head. The first and second quarters of 2015 will average $48. His third quarter projection is $32.

The PED virus is the wild card. “If producers overbreed to compensate for 6% death loss and don’t have it, we’ll have 6% more pigs,” says Hurt.

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