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'Tsunami of red ink' ahead for hog business

U.S. hog herd numbers are being slashed hard as per-head losses start to pile up because of previously high inventories and skyrocketing feed prices on account of this summer's drought.

Now, a "tsunami of red ink" is on its way to the hog business as the marketplace shoves losses as high as $60/head down farmers' throats. And, as that tsunami nears, it appears a few steps producers took to lighten the downturn's blow have actually helped inflame the situation.

"Slaughter numbers in the past 2 weeks have been up 6% when only about 1% more hogs were expected. This has caused a $10/CWT drop in live prices since late July, with prices now in the low-$60s," says Purdue University Extension livestock economist Chris Hurt. "The source of those extra hogs is probably related to some delayed marketings due to the summer heat, to a desire to sell pigs more quickly before prices really tumble moving into fall, and to high sow slaughter. Projected prices for the final quarter this year are in the mid-$50s, using current lean hog futures as a base. Tragically, costs of production are expected to be above $75 per live hundredweight for the remainder of the summer, this fall, and winter."

Summer per-head losses will likely settle around $30, with another $30/head losses expected in the fall. That $60 in per-head losses will be followed up by $38/head and $5/head losses in the first 2 quarters of next year, Hurt says. That adds up to about a $4 billion hit to the industry overall. And, the bad news is even though herd liquidation is underway big-time now, it won't move the needle much until next summer.

"The dilemma for the industry is that the enormous losses are going to occur for pigs that are already born," Hurt says. "Continued liquidation of sows will not reduce slaughter numbers until next summer and so does not address the short-term financial disaster. Short of euthanizing young pigs, reduction of weights can reduce total pork supplies, use less feed, and enhance hog prices."

Ultimately, the herd liquidation and bleeding of profits in the hog sector will likely lead to a new-look industry once the market's bounced back, which Hurt says is likely by the middle of next summer. Until then, individual farmers' ability to get through the downturn will depend a lot on how they bounced back after the last period of major losses.

"Financial losses of the magnitudes projected here will cause massive erosions of family equity and some bankruptcies. Unfortunately losses in 2008 and 2009 were not fully recovered by the profits in 2010 and 2011 so that some producers face this tsunami in weakened financial condition. Family hog farms with a sizable land base will have land equity to draw on. Larger hog producers with a minimum land base will need to draw on corporate equity and then their lenders," Hurt says. "Lenders will make the final decisions for the weakest, but will strive to keep companies in operation as they seek new buyers. This means that another round of consolidation of ownership can be anticipated. Unfortunately, individual producers are going to need to find their own way through the short-term carnage."

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