The following article was originally from SiemensSays.com. I think it is a very insightful analysis into the recent announcements in the pork industry.
- Loan guarantees will help some producers. But, what is the criteria for a viable hog operation? The Canadian industry is currently losing $30 million a week. The situation is deteriorating daily.
- The Hog Farm Transition Program of $75 million will help if it effectively pays people to get out of the business. This would cut production. No details yet, but it appears it€™s like the U.S. dairy buyout where producers will bid to leave the industry for three years. If it only pays existing producers, not ones that already quit, it can significantly cut production. For example: €˜At $500 per sow bid the $75 million would cut 150,000 sows out of production.€™ If it pays people already out of business, the plan will do little to cut supply.
- The Government says detailed information will become available over the next few weeks. The industry is in crisis; they have been working on this for months €“ it€™s too bad the Government is not ready. Not sure what the point is to gradually reduce supply as the Government proposes; gradually will lead to further attrition in the potential survivors. We need them out fast! Get it over and move on.
- Not a stellar day for the Canadian Pork Council. The cattle industry got billions for Mad Cow. The Canadian Pork Council came up short on their $800 million want list for compensation for H1N1 effects and the economic crisis.
- At the press conference, Minister of Agriculture Ritz assured he had talked to the U.S. Secretary of Agriculture Vilsack. All was good with the plan. Loan guarantees are allowed.
- Not to think that only Canada supports producers, Agriculture Secretary Vilsack, announced last week that USDA rural development and the Farm Service Agency €“ FSA, were to help use all available means to help producers hit by worsening economic conditions. $1.7 billion from the American Reinvestment Program and Recovery Act has been made available. FSA has been instructed to increase efforts to provide loan assistance to livestock producers. The agency sent a letter to direct borrowers outlining the options and tools available to help ease financial stress. The letter encourages borrowers to contact their local county offices. Options available include rescheduling, reammortization, deferral, and in extreme cases reducing debt.
- Bottom line €“ Canada and USA are liquidating. Both countries governments are stepping in to help out. We doubt that it€™s enough to stem the tide of liquidation. We do not expect Canadian liquidation alone will cut supply to profitable levels without the US doing likewise. Both countries need and are getting liquidation.
This Is Bad
Our industry is losing $40 to $50 per head currently. USA €“ Canada aggregate weekly hog marketing are 2.6 million and making a weekly loss of $100 to $130 million. It€™s dismal. It€™s been almost two years of constant losses. This past week we travelled the U.S. Midwest. Our observations:
- Producers are shell shocked. The question, €œWhen will this end?!€ is asked repeatedly.
- Sow liquidation has picked up. Reports are the sow plants are taking all they want; before, they had capacity. Sow prices have dropped in the range of almost $100 per head. That€™s a reflection of supply.
- We saw lots of corn and soybeans on our tour. Indiana, Illinois, Michigan, Iowa, Missouri, and Nebraska crops look great (except where it hailed). Every ditch for 2400 miles was green as could be. This is the middle of August! Rain and now warm weather. We are no crop experts, but everywhere we went the crop was described as excellent by the locals. U.S.D.A. last week predicted 12.7 billion bushels of corn. We might have lots of other problems right now in our industry, but feed availability is not one of them.
- Lean Hog Futures have hit multi-year lows. There are no hedge opportunities for profit. We expect the non Ag funds will begin to look at the historical lows and this coupled with sow liquidation will start driving up spring 2010 futures. We believe the U.S. is liquidating (combination of gilt retention and sow slaughter) 10-15,000 sows per week.
- We received several emails last week encouraging us not to talk about liquidation. Like people out of money and out of faith will stay in the business because we give some optimism. When you are out of capital (cash) and courage, it€™s over. No words or optimism will keep you in business. Cash is king.
Some Government Aid, but in an industry losing $100-$130 million a week, it will do little to stem the tide. In the last two weeks the collapse of cash and futures has broken the spirit and future of many. We are liquidating. We expect deferred lean hog futures will gather steam soon. There is no way next spring and summer hog supply will not be seriously cut. One packer told us last week that we need to start talking 90¢ hogs again. H1N1 destroyed this summer€™s market, but it will be over by then. Does anyone in their right mind believe small pigs will be $4.00 each a few months from now? We expect $60.00 in January. The retail price of pork is higher than a year ago as supply demand adjusts. Our prices will recover. The retail price of pork, higher than last year, tells us we are producing a product people want. We are not making wagon wheels. There is, believe it or not, a future for many.