For the past two years, the swine industry has been battered by high costs and unprecedented accumulated losses. The billion-dollar question is: Have we turned the corner toward sustainable profitability? While I don’t know the answer, we are seeing signs that better times are ahead. Costs continue to drop, production remains strong for most, and the hog index is holding steady.
In the first half of October, cutout averaged just under $95, and the CME Index has averaged $84.36. This is a welcome surprise as demand remains strong. It’s evident by the continued surge in exports through August, up 4% from a year ago and up 7% in value over the same period. The U.S. Meat Export Federation is projecting record highs in both value and volume for the year. Most importantly, cost of production continues to fall as producers start to feed $4 corn. I have seen production costs ranging from $78 to $84 per cwt. While this isn’t the home run producers are waiting for, it is allowing them to rebuild both liquidity and equity in their operations.
Do You Want to Stay?
As you recover financially, the key question to ask is: Do I want to remain in the swine industry long term? After the prolonged downturn we just experienced, everyone has doubts, but the question remains: How do I position my farm to withstand adversity?
Our recommendation is to assess your liquidity position and rebuild working capital. That might mean delaying deferred maintenance of facilities and equipment, holding off on purchasing the neighbor’s 160 acres for sale or postponing that new combine purchase.
A standard working capital target we look at is $600 per sow, including breeding livestock value. This is calculated by taking current assets, subtracting current liabilities, adding the value of breeding livestock and dividing by the number of sows in your operation. If you purchase all your pigs, use a sow-equivalent number. At Compeer, we target $600 per sow as a minimum amount of working capital to help producers survive tough times. I recommend $1,000 per sow.
For some, this might seem extreme. Two years ago, our average producers had in excess of $1,200 per sow. Those same producers now have an average of $723 per sow, a loss of $477 per sow. This amount would have been much higher without the debt restructures over the past few years. Over the past two and a half years, the average producer also added $285 per sow in fixed-term debt. Not all of this was used to rebuild liquidity, but the majority was.
If you believe the $600 threshold of working capital is adequate, the average producer would have been close to insolvency with that mindset. Hopefully, we won’t see a downturn for 15 to 20 years. However, in my career, each downturn has lasted longer and led to deeper losses than the previous one.
Looking ahead, there are good profit opportunities to start rebuilding liquidity. Over the next 12 months, the average producer should be able to profit off $20 per head with good production. Mitigate marketing risk by executing marketing plans. The risk of doing nothing is too great. If you execute a plan, the risk of being wrong is that your unhedged hogs might be worth even more.
Click here to see more...