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Pork Powerhouses 2002: Cheap Hogs, Pricey Grain

If this fall turns into another 1998, it won’t catch the major players in the pig business unaware. Our exclusive Pork Powerhouses survey of the largest producers shows that most are in action as hog prices plummet and grain prices rise into the fourth quarter. Some producers are liquidating their bottom tier of poorer producing farms, some are putting farms up for sale, while others are simply cutting costs even further. Click here to view the Pork Powerhouses list

(Photo: Canadian pork producer Peter Voldeng of Naicam, Saskatchewan, is pouring cement for a 600-sow expansion to complete his 1,600-sow design capacity. Part of the production will be marketed as feeders, probably to Iowa farmers.)

“We are smarter than in 1998 and staying ahead of the curve, moving hogs forward as much as viable,” says Pete Petersen of Land O’Lakes. “We are selling hogs 6 or 7 pounds lighter than one year ago. That’s significant.”

“We’ve been through this before,” says Bob Ivey at Goldsboro Hog Farm in North Carolina. “We always run scared, so when we are making money like we did last year, that’s when we tighten the belt.”

The 2002 Pork Powerhouses ranking shows a net of 103,000 sows added by the largest producers in the U.S. and Canada in the past year. That number would be higher except for Tyson Foods’ announcement that it is liquidating about 30,000 sows. Those sows will most likely not be replaced, as the contract units being dropped are outdated, says industry sources.

Watching Canada

In Canada, expansion has slowed to a crawl. More than 30,000 sows were added by the largest producer’s north of the border last year, but only limited expansion is planned for next year. 

Some growth continues in the western provinces. Peter Voldeng hopes to send some pigs from his expanding Saskatchewan farm to Iowa barns. Isolation in the prairie means less disease, and clean pigs are an advantage Canada still holds.

Some U.S. producers blame Canadian sow expansion in the past three years for the glut of the both market hogs and young pigs on the market today. But others say, “We probably did it to ourselves.” In any event weaned pigs were officially selling for $5 Canadian ($3.25 U.S.) in August. Unofficially, some pigs were free for the cost of transport. No matter. “Pencil it out and you can’t even make money feeding free pigs right now,” notes one U.S. producer.

How long will we suffer? The Pork Powerhouses are hoping for a speedy recovery to the cash hog market. “As long as we don’t lose any shackle space, this fall won’t be as bad as everyone is bracing for,” says Bob Christensen of Christensen Farms in Minnesota. “Nine months from now we will be pleasantly surprised.”

We are hitting bottom early in the fall and will see “a slight rebound by December,” says Lawrence Parks, president of Parks Livestock, a swine marketing company with locations throughout North America. Parks saw large sow kills all summer, but until August most sows were being sold as part of a depopulation/repopulation to improve herd health and genetics. By September, entire production units were liquidating for good.

“There are a lot of smaller producers saying ‘the heck with it’ and selling out,” says Parks.

The sagging markets have spurred three large hog operations to put out For Sale signs: Triple Edge Pork, Vall, and ValAdCo (12,000 sows). The buyers will likely be other large hog companies, and it’s a safe bet giant Smithfield Foods is looking. 

“Our acquisition strategy can be described as opportunistic,” says Jerry Hostetter, vice president of investor relations and corporate communications at Smithfield. “If the right opportunity comes along at the right price, we would seriously consider it.”

Smithfield isn’t immune to pain in the pig business, however. In late August, the company announced earnings for its hog production group of $19 million compared to $120 million one year earlier. This drop was a result of live hog prices $15 per hundred weight below the previous year, said a company press release.

“Unprofitability in hog production always has resulted in herd reductions, followed by a return to higher prices and profitability,” said Smithfield chairman and CEO Joseph W. Luter III in a press release. “Given this historical pattern, we remain convinced that our vertical integration strategy will ensure superior results, despite temporary losses in hog production.

With live hog prices depressed for the remainder of 2002, “This will negatively impact earnings in our production operations,” said Luter, “and it is unlikely that we can fully recover this profitability in meat processing.”

Sows still going in 

Another vertical integrator, Seaboard Farms is not sitting idle. The company is placing 27,000 sows this fall in western Oklahoma at its Wakefield site. Seaboard calls the growth a “completion” rather than an expansion, says vice president of development, Mark Campbell.

“The Wakefield sow farm has been 30% built since 1997. We resolved the political and regulatory issues with the site, and it behooves us to stock it and capitalize on the investment and we’ve already made,” says Campbell.

Those new pigs will head to Seaboard’s Guymon, Oklahoma, plant, which is already running tight. Seaboard hopes to build a second pork plant in the next few years, this one in Texas, but no timetable has been set.

Expansion is taking place in Illinois, where Maschhoff Pork is adding about 10,000 sows a year. “The time to expand has been when nobody else is doing it,” says Ken Maschhoff. “I know that is not a popular thought, but it has worked for us. We want the first pigs out of our expansion to hit the cycle at the right time.” Maschhoff hopes to go from 35,000 to 48,000 sows by late 2003.

High corn a good thing?

How significantly will higher feed costs affect the Pork Powerhouses? While a few don’t lock in any of their grain, most of the top 40 had at least a portion of their corn and meal locked in before the market climbed in August. Smithfield’s hog production group, Murphy-Brown, is “bought forward in grains several months to ensure supply,” says Hostetter. He doesn’t predict any cost increases in feed for the near term at the company.

“We don’t expect the fluctuation in commodity costs to affect our overall growth plans,” says Murphy-Brown spokesperson Don Butler. 

Higher-priced corn may be a good thing for the industry in the long run, say some Pork Powerhouses. “When corn is cheap, farmers in the Midwest feed it to hogs. That can drag out a low market a long time,” explains one North Carolina producer. “The hog market will correct itself quicker with high priced corn.”

Predicting the hog market is like predicting the weather, says Howard Hill of Iowa Select Farms. It usually ends up surprising everyone. Most hog companies have marketing contracts and can cover cash flow needs into the mid $30s, says Hill, “but anything below that is a lot of red ink.”

For everyone, all areas of production are being scrutinized. “Our goal is to retain only the facilities that are most efficient,” says one Midwest producer. While the market is down, some producers are taking the opportunity to depopulate portions for their herds for disease cleanup.

“At Cargill we are going through a massive campaign to eradicate PRRS,” says Hugh Dorminy, general manager. “PRRS became too great for us to deal with, so we have to eradicate it.” The company is closing some herds for six months to get rid of the virus. It will take two to three years to get it out of all the sow farms, says Dorminy. 

J.C. Howard Farms in the North Carolina is also going through a depop/repop, and general manager Jimmy Pollack says, “It has already made us more competitive. Medicine and vaccine costs have been reduced 75%, and we are seeing improved growth and feed efficiency.”

More pigs coming

This herd cleanup means more pigs later, says Greg Howard of Premium Pork in Ontario. “The biggest detriment in the U.S. pig business is health, so the larger U.S. producers are depopping now when they’re not getting anything for their hogs,” says Howard. “Those sows will come back healthy and more productive.”

Still growing in western Canada 

One final frontier for pork production may be Saskatchewan. The province’s wide-open spaces mean few neighbors, less disease, and ample feed supplies. Pigs produced there went from 1.2 million in 1999 to 2 million this year.

“Saskatchewan could easily grow to 10 million hogs, and we can do it in an environmentally sustainable manner,” says Florian Possberg, CEO of Big Sky Farms, the largest pork producer in the province, with 23,500 sows on 27 sites. 

“Saskatchewan has about 45% of the cultivated land in Canada and less than 10% of the hog production,” says Possberg. “We have the feed supplies and the land to utilize the manure by-products.”

One expanding hog company is Community Pork Ventures (formerly Quadra Group) in Outlook. It has 13,000 sows on 18 sites and will double the capacity in 14 of its 600-sow units in the next three years. “We’re selling to a packer who’s killing 1.5 million hogs a year and eventually needs 4 million,” says Richard Wright, president.

Opportunities, with caution

In Saskatoon, Heartland Pork owns or leases 26 barns with 18,000 sows. “Saskatchewan has tremendous opportunities to grow,” says Neil Ketilson, COO. “We have all kinds of ability to grow grain. What we’re trying to do is diversify and value-add. The oldest way of doing that is through livestock, either hogs or cattle.”

Saskatchewan’s largest privately owned hog farm is Stomp Pork Farms with 9,000 sows. Owner Ivan Stomp has expanded, adding 5,500 sows and building a new mill, but he is concerned. Forecasts for 3 million hogs from Saskatchewan in 2005 “aren’t realistic,” Stomp says. 

“I’m a bit concerned about where all the product will go. We can produce millions more hogs, but somebody’s got to pay us for them.”

“Today’s construction will take years to pay for the investments, says Stomp. “We’re still thinking of expanding a little bit, but these operations are tremendously indebted facilities, and we need to be looking down the road.”

By John Dietz, Arden, Manitoba

Country of origin causing concern 

Plans by the U.S. to label pork as to country of origin are spurring changes in Canada. “We had planned more expansion, but are holding up and waiting for the definition of country-of-origin labeling,” say Don Janzen of Hytek in Manitoba. Hytek ships half of its pigs to the U.S. Janzen says the cost of labeling will be borne by everyone on both sides of the border. 

“I don’t have a problem with labeling it Canadian pork, because it is every bit as good as U.S. pork,” says Greg Howard, general manager of Premium Pork in Ontario and Manitoba. Howard wants the new labels to read: “Born in Canada. Raised and fed in the U.S.”

Ab Freig at Puratone in Manitoba says, “The U.S. consumer will like Canadian pork, but will the packers want to stop the line to label it? That is the question.” Blaming Canadians for low U.S. hog prices is unfair, says Freig. “We are not dumping hogs in the U.S. Farmers are buying our wearers and building barns to feed them. It’s free trade.”

‘There is a lot of fear; people are getting out’

Here are some selected thoughts from the Pork Powerhouses:

  • “If we see $25 hogs and $3 corn for 60 days, a lot of farms will change hands. Noboy in the pig business has a ton of money sitting around in the back room.”
  • “I get calls every day from Canadians saying, we’ll give you 3-week old pigs if you come and pick them up.”
  • “Just like in 1998 the strength of weaned pig contracts will be tested. If people back out and break them, who is going to trust anyone in this industry again?”
  • “The packers can stand one more round of ledger contracts, then that will change.”
  • “There is a lot of fear right now; people are getting out. I know three producers with a couple hundred sows each who just quit.”
  • “If the market drops for an extended amount of time, the packers will own it all. There will be a huge shake-up with half the industry changing hands.”
  • “We are just trying to keep our heads above water. We have some feed locked in, but not enough.”
  • “A lot of farms are for sale. I get calls all the time from guys with 1,200 to 5,000 sows. Most of the systems aren’t attractive, and they are asking too much.”
  • “We are seeing a lot of sow liquidation; lenders are pulling in the reins. There are 5,000- and 6,000- sow units selling out. The problem is you can’t get anything for sows.”
  • “We need to even up the dollar exchange with Canada. They should pay some tariff on pigs. We watch the trucks full of Canadian pigs come down the road and just hope they don’t run us over.”
  • “Want to get rid of integration? Outlaw contracts and force all hogs to be sold on the spot market. Go back to true price discovery.”
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