Brumm Speaks Out

As I write this week’s comments, I’m sitting in a feedmill just outside of Iowa City, Iowa. Dr Steve Pohl, extension ag engineer at South Dakota State University and I have been conducting a series of ventilation workshops in eastern Iowa and western Illinois this past week. As you might expect, we’ve seen a lot of water. Surprisingly, we’ve also seen some very good corn and soybean fields, and talked with producers who say they have very good crops.

In general, it appears from our conversations and travels that northern and central Illinois has a very good looking crop. Living in Mankato, MN, I can also say the crop in southern Minnesota is pretty good. Yes, the crop is delayed from the last few years, but it appears that the recent warm days and nights have pushed heat units along rather well.

Where are conditions poor to terrible – central to east-central Iowa. There are large numbers of acres still under water, or just planted/replanted this past week, especially in those areas where the glaciers left the topography relatively flat. Thus, there is a wide swath of crop production problems running from the Des Moines/Ames area to Waterloo back to Algona.

Surprisingly, in southeast Iowa where there was major flooding along the Iowa, Cedar and Des Moines Rivers, crops don’t look too bad, other than along bottom lands. Water continues to obey the laws of physics and run off hills.

This weeks grain markets have responded to comments from the Iowa Farm Bureau and others that Iowa will have a $3 billion dollar negative impact to feed grain production as a result of the floods. On Monday, the USDA crop estimates will be everyone’s first look survey results, and it appears the government is making a special effort to resurvey flooded areas to be sure this crop estimate captures the impact of the flooding.

Steve and I stayed in Keokuk, IA for 3 nights on this trip. We were only 3 blocks from the lock and dam on the Mississippi River and can attest to the vast amounts of water that are flowing down this stream, and the power of this flowing water. On our way home this evening we are planning on taking Interstate 380 north from Iowa City and it runs thu the heart of the flooding and devastation at Cedar Rapids.

With corn and soy bean meal prices rising beyond all time highs and beyond anyone’s wildest thoughts, is rationing occurring? I think yes as VeraSun, one of the largest ethanol producers, announced this week the suspension of startup of 3 or more new plants that were scheduled to begin consuming corn this fall. Based on cost of production estimates from Iowa State University economists, I suspect many other ethanol plants are starting to feel economic pressure to reduce or even halt production. Many of the estimates that I’ve seen suggest many ethanol plants can recover variable costs when they pay $7 for corn, but when they have to pay $8 they are loosing money.

I think everyone agrees that when pork producers pay more than $7 per bushel for corn and over $400 per ton for soybean meal, the opportunities for any profit in today’s market don’t exist. As an industry, we still continue to play chicken – who will quit first?

In the past few weeks I had a long conversation with a cull sow buyer and he said inquiries were picking up, but he wasn’t ready to pay much for the sows. The price he pays for sows is driven in part by how many are offered for sale, but also by the consumer market for his products. Many of the sows slaughtered in the US are converted in bratwurst and other sausage products. The demand for these products by consumers is tied very closely to grilling, and with record heat in California and the east coast, and rain in the Midwest, the consumer demand for sausage products for grilling hasn’t picked up yet. Thus, our attempts to reduce the breeding herd are running head long into cull sow prices that are very low because of the consumer market for the products of the cull sow sales.

While I’m aware of a few sow units that have been emptied in the past month, I’m also aware of units where the lender is doing the math on cull sow income and saying don’t sell sows yet – you can afford even high priced feed for a few weeks or longer in anticipation of a higher market price for the cull animals. This means a few more weeks of pig production since no one feeds non-pregnant females.

All of this suggests that we have a long way to go before the US and Canadian breeding herd is reduced to a level that results in prices paid for slaughter animals rises enough to cover feed costs. I ran some diet projections this morning with corn at $7.50/bu and hipro soybean meal at $400/ton and came up with $0.45 feed cost per pound of gain for grow-finish pigs having a feed conversion of 2.8. Those of you using DDGS may have slightly lower cost estimates, but these are still high compared to the $0.17 costs of 3 years ago.

Being caught between a rock and a hard place isn’t much fun for many producers at the moment.

I’m sitting in the London, Ontario airport following my participation in the 35^th Annual Ontario Pork Congress. While many have heard about the Canadian situation, a visit with producers and allied industry really is a good wake-up call to the global decisions that impact local production.

One of the most common questions I was asked as I walked the trade show was – Does Canada have a future in pork production? Being a person with a good extension background, my immediate answer was – that depends! The ‘ifs’ that go with ‘that depends’ are huge for Canadian producers, and worth keeping in mind as we in the US struggle with floods, high grain prices and welfare issues, etc.

Let’s begin in Ontario – once the second largest province for pork production in Canada. Producers here are actually feeling good about grain prices – for years they had a ‘plus’ corn basis to Chicago so they have been aware of high ingredient costs much longer than the Midwest producer. Recently, the local basis is the same as northwest Iowa – they can source corn for approximately the same price as a Sioux County, Iowa producer. Sounds like a good deal for Ontario until you learn that their only major packer, Maple Leaf Foods, intends to close the slaughter plant in Burlington in the very near future. That leaves many farrow-finish producers without many options for a market for their pigs. Until COOL is fully implemented in the US, these producers don’t see many market opportunities in the US, either in Ohio, Pennsylvania or Indiana. While some producers have adjusted and are now producing pigs for niche markets, many are facing a future that most likely won’t include pork production. The general consensus of the producers and allied industry members I talked with the past 2 days is a much different swine and most likely smaller swine industry going forward.

In Manitoba, they have the Maple Leaf plant at Brandon increasing slaughter capacity, at a time when the provincial government has placed a moratorium on new facilities. Couple this with a very strong Canadian dollar which makes Canadian product cost more versus US product in such markets as Japan and Hong Kong, and high feed prices, and you have a picture of another provincial industry struggling for direction.

In Quebec, there are on-going discussions between the provincial government and the pork industry as to the direction of future governmental support programs. Similar to other provinces, the relatively small size of their slaughter plants (and the resulting high costs) is impacting their ability to compete in a global economy.

In Alberta, they have extremely high labor costs due to the competition for labor from the oil shale fields. However, they have a provincial government that has announced its support for keeping their industry a part of their rural economy.

The study of the current Canadian situation is important for US producers trying to understand their future as they face flooded fields, high (and going higher?) grain prices. The current relatively weak US dollar versus other world currencies has made US agricultural products even more competitive in the global market. The good and bad news of this is that live hog prices would be considerably lower right now if we weren’t able to send so much of our product to other countries. At the same time, feed grains from US sources are also very competitive, meaning even with our relatively high prices, other countries continue to buy US feed grains.

Does the US have a future in pork production – no hesitation here on my part – YES. Pork is the preferred animal protein for the world, with a 40% world market share. The US has the feed grain resources, the slaughter and processing resources and the financial resources to continue putting the package together as the worlds second largest supplier of this desired commodity.

Who will succeed in pork production in the coming years? I wish I knew the answer to this question. Prior to the impact of the ethanol boom on feed grain prices, many had argued that the most successful had a production model tied to purchase of feed grains since the government farm program resulted in a world grain price lower than the cost of production. In the post ethanol boom era, pork production tied to a land base for production of feed grains suddenly has the chance to become very competitive.

However, access and use of capital will be an issue, both for feed grain and pork production. This suggests that innovative business models will develop in the next few years whereby those with access to capital will link grain production and pork production in some type of bridge relationship. One of the keys to the successful bridging will be the value of swine manure – Liquid Gold  to the grain production side of the equation. Access to feed grains at a competitive price is what the pork production partner is looking for. Access to capital and slaughter plants become the linkage pulling it together.

This linkage model suggests that pork production will continue to consolidate, both in ownership and in location. Pig manure has become too valuable to feed grain production to store it in lagoons so that large amounts of nitrogen can be lost to volatilization prior to land application. Iowa already has almost 30% of the finishing pigs in the US. This can be expected to increase. At the same time, there will be renewed interest in returning pork production to Illinois, once number 2 in the US for pig numbers. Southern Minnesota will keep it’s share of pigs also.

Corn and pigs – our grandparents really were on to something good for rural communities.

With daily federally inspected slaughter continually running above 400,000 pigs, there is limited evidence of a reduction in pork production in the US. On April 1, the Canadian breeding herd was down 12%, and there are lots of individual stories suggesting that liquidation in Canada is continuing.

In the US, reduction of the breeding herd is progressing at a much slower rate. The question being asked by everyone – who is going to be the first to quit? Even with cash corn now at $6.50/bu and a large share of the 2008 crop having very wet feet, there doesn’t seem to be anybody coming forth with major liquidation plans.

As you think about who will be the one to sell sows, you can come up with some interesting scenarios. Lets begin with the traditional producer, now often having 1-3000 sows. This farrow-finish system owns much of the land associated with it’s pork system, grows the corn it feeds to the pigs and utilizes the manure from the pigs. The decision to sell the sows from this production system rests partially on whether pork production is part of the plan to involve the next generation in the family farm. That is, if the pigs are sold, will there be enough work for the 2 or more family members that rely on the farm for their lively hood. Even with rising input costs, the cost to produce a bushel of corn is thought to be under $4/bu, and every 8 pig spaces in finishing equates to 1+ acre of manure credit. While this operation short term would make more money selling cash corn for $6.50/bu, with cash hogs in the $50 window, they are still successful financially for the overall farming enterprise. This producer isn’t facing the same economic incentive to quit pork production as producers who are buying cash corn at almost $7/bu.

Let’s look at that producer. Generally they have several farrowing sites, often with 2-5000 sows per site. Suppose they make the decision to quite pork production. The assets invested in the farrowing sites have a value, and the lender to the producer won’t support leaving the asset idle. The end result is that if the producer decides to quit production, the farrowing site is apt to be sold, often times with inventory, to another producer.

Last week I did a walk thru of such a situation – the sow unit is ‘for sale’ and at least 4 different parties have been thru it prior to making a bid for the facility and the female inventory. The net result is that while the production system that currently has the facility reduces its sow inventory, the US inventory doesn’t decrease.

Add to this the tremendous value hog manure suddenly has. With anhydrous ammonia near $800/ton, grain farmers are literally lining up for access to manure. Last fall it cost approximately $35/acre to inject manure from finishing facilities within 2 miles of the facility. The current fertilizer value of this injected manure is now above $150/acre.

The above scenarios suggest that the decline in pig numbers that will ultimately be necessary to result in an increase in price (supply and demand does work) won’t happen soon. Everyone is waiting for someone else to go first. In the meantime, we are all bleeding to death from $6.50 corn and too many pigs. What a painful death.

Blogging is a new experience for me, but in many ways it is similar to what I often did in Extension meetings in Nebraska. For many years, one of the most popular sessions I led was an annual meeting with the Knox County Pork Producers that they called ‘Brumm Speaks Out’. This meeting was a free-wheeling discussion of a variety of topics that impacted pork producers in Knox County. Topics included public policy, new technology, disease, finance, management and anything else on the producers minds. After 20+ years of working with the producers, I had been on many of their farms and was familiar with many of their concerns.

With this blog, I hope to carry on a conversation with producers about a variety of topics related to their success. My hope is that as a result of participation in this blog, readers (and those that post a reply) are better able to navigate the many decisions that keep pork production a valuable partner in the economic prosperity of rural America