Brumm Speaks Out

In the past few weeks, I’ve been asked repeatedly for my thoughts on the profitability of the US swine industry in 2009. The reason for the question is the large amount of uncertainty in the outlook for the many variables that are part of the profitability equation.

On the supply side, the USDA will release its December 1 estimates of the US inventory next week. This will be followed by Canada’s January 1 estimate released in late January. While everyone expects the Canadian breeding herd to show continued reductions in numbers, the reductions in the US breeding herd are less clear. At the same time, all of you are experiencing tremendous increases in productivity, both from your female inventory and in your grow-finish facilities.

It is now reasonable to have targets of 1.5% death loss in nursery and 1.5% death loss in grow-finish facilities, something unheard of just last year. Many of you now target 93%+ of the pigs weaned as ‘prime’ pigs, that is, pigs that end up going to the slaughter house versus death loss or a cull buyer. Conversations with a cull buyer in the past week confirm that many are actually looking for cull pigs to fill orders, something unheard of just 1 year ago.

At the same time, daily gains in grow-finish are routinely approaching 1.9 lb/d in closeouts with feed conversions of 2.6 or less on meal diets and only small amounts of added fat.

In breeding herds, the standard for years for doing cash flow estimates, etc. was 20 pigs per inventoried female. Many of you are routinely hitting 24 pigs, with the best approaching 27.

These improvements in breeding herd performance suggest to me that we haven’t reduced the North American female inventory sufficiently. We will continue to have large volumes of pigs going to slaughter in the US in 2009. While peak daily slaughter numbers may not hover at 420,000 per day like they did this fall, they could easily hover at 380,000+ head weekly, which is still a very large number of pigs.

The impact of COOL on production numbers is still unclear. I have had reports of finishing facilities coming up empty as pig owners decide not to refill with their usual Canadian source. On the other hand, there is limited evidence that the flow of Canadian weaned and feeder pigs is rapidly slowing in anticipation of an April 1 deadline of some packers. For the week ending December 13, we imported 107,674 pigs weighing less than 110 lbs. For the week ending December 19, the USDA feeder pig price report (http://www.ams.usda.gov/mnreports/NW_LS255.txt) listed 50,000 pigs as coming from Canadian sources, out of a total report of 129,860 pigs. This suggests that Canadian born feeder pigs will remain important to US finishers.

What about export markets? I think all of us recognize the importance of this market to our financial success. So far, even in the face of a strengthening dollar the world seems to prefer our product – great news for all of the hard efforts we all put into assuring the world of the high emphasis we place on food safety in our production systems. As the Canadian dollar falls, we can expect increased competition from them in world trade.

However, I don’t look for increased competition from European sources such as Denmark. Producers are struggling with increased environmental regulation, limits on GMO feed ingredients that are driving up feed costs, and a host of other challenges that will limit their ability to compete with North American sources.

I’ve been involved in many behind the scenes work on the issues of swine facilities in rural communities. As I’ve worked with various public policy groups and ag commodity groups, there are 2 statements that often arise as we discuss opportunities for youth to return to agriculture. The following is my reply to these common statements.

Statement 1 – When I retire and stay on the farm, I have a right to expect clean air and no odor.

In the past, when a farm couple retired, they generally moved to town. Increasingly retired couples are choosing to rent out their land and remain on the farm – often for many years following retirement from active agriculture.

At first glance it seems logical for this couple to expect a quality of life in retirement on the farm. However, this expectation places limits on the rural community that weren’t there when they began their careers in agriculture. When their careers began in agriculture, it is most likely that animals were part of their start-up. That is, to begin their career in agriculture they had some cows or pigs or ???, often in conjunction with dad or other family member. Their house and farmstead ‘smelled’ like a farm, especially on rainy days or days when it was time clean lots or facilities. Odors associated with animal agriculture were a part of the rural character. One of the reasons for moving to town at retirement was to ‘escape’ these odors.

The expectation of no offensive odors (whether from animal ag or other sources) means an expectation of a declining rural community. This expectation results in fewer neighbors, and less long term changes in the neighborhood. While not all change is good, the expectation of no change in a changing world is an expectation of slow death – exactly what is happening in rural communities.

To have an expectation of a rural community without animal agriculture in Nebraska, Iowa, Minnesota and S Dakota is to have an expectation that the rural community will slowly die. Yes, you would like to retire on the farm, but if you expect to have a strong agricultural community in the next decade(s), this retirement must be accompanied by a willingness to accept animal ag and a realization that there will be occasions when animal ag, in spite of it’s best efforts, will impact you. If everyone in rural communities has an expectation of no negative impacts from animal ag at any time, then the expectation has to include the realization of the consequences. Yes, there are concerns regarding the size of some animal production facilities and concerns regarding their impacts on water quality. However, if both production facility developers and rural citizens approach the issues with a recognition that animal agriculture contributes to the economic well being of the community, satisfactory solutions to many of the concerns of both parties can be achieved.

Statement 2 – I don’t understand why youth don’t want to return to my community or I don’t understand why youth want it all when they start farming.

To respond to this one, we need to think about the change in expectations and opportunities from our parents/grandparents generation to our generation. Even as late as the early 1960’s agriculture was the goal of many rural youths. In the 40’s, less than 50% of all youth graduated from high school – many didn’t even make it to 8^th grade. By the 60’s, rural communities achieved a very high graduation rate and still rank among the highest in all of the US. Increasingly parents pushed their children to obtain a college degree. For many, the goal was to have employment experience ‘in the real world’ before returning to the rural community and a career in agriculture. In fact, this ‘real world’ experience changed the expectations for the next generation.

In the past, beginning a career in agriculture meant living in the ‘old’ house till mom and dad retired to town. It meant financial sacrifice and long hours. With ‘real world’ experiences, beginning a career in agriculture is different now. Youth returning to agriculture have a college degree and the knowledge that if farming doesn’t work out, they have other opportunities.

With these opportunities comes less willingness to sacrifice. A young wife can be heard to say ‘why do we need to live like this when you can get a salaried job with your degree?’ This translates into the need for $35-45,000 in after tax income for family living expenses in order for the family to return to a rural community.

As a result of the educational opportunities our parents provided, we have changed our expectations for success in agriculture. These changing expectations mean we need larger farm operations to begin with. One number several ag lenders have used with me is it takes $300,000 in gross revenue per family unit for a family to be successful in northeast Nebraska in agriculture full-time. I’m sure this number is even higher today given the very large increase in input costs and most likely is nearer to $400,000+. If we place restrictions on the types of agriculture we allow in our rural communities, we place restrictions on the number of people who will return to our rural communities in agriculture.

With carcass bids still languishing in the $53-54/cwt range in the US, I thought it would be fun to take a look at current market prices for slaughter pigs in Europe. The following data was compiled by Feedinfo News Service (www.feedinfo.com). I converted the price reported (Euros per kg carcass) to US values ($/cwt carcass) using yesterdays international conversion rate of 1 Euro = $1.268 USD.

Keep in mind that the conversion rate fluctuates constantly, and with the US dollar increasing in value (more dollars per Euro), the prices paid in Euros rise when converted to US dollars. Another item influencing the conversion to US prices is the difference in slaughter techniques. In the US, the Chicago Merchantile Exchange uses a dressing percentage of 74% for the conversion of liveweight to carcass weight. That is, a 260 lb liveweight pig is estimated to yield a carcass weight of 192.4 lbs. This is always with the head removed, etc. In Europe, carcass weights often include the head. In addition, they use differing techniques to remove internal fat, feet, etc. This often means they have dressing percentages greater than 80%.

Finally, while the prices may seem high relative to US and Canadian prices, keep in mind that their costs of production are always higher than ours. They pay more for feed grains, more for labor, have higher priced facilities, have significantly higher expenses in meeting regulatory requirements, etc.

Similar to the US and Canada, European producers have been reducing their breeding herd in response to the lack of profitability. While the following prices appear very good to us, they are not high enough to support long term profitability for European producers.

The data also illustrate the impact of the strengthening dollar on our export trade. As the dollar strengthens relative to other currencies, it becomes less expensive to purchase pork from other suppliers. While the price of EU pork increases when priced in US dollars, when priced in another currency the price rise may not be as large, making European pork more competitive in export markets.

Even with all of these differences, it is still fun to compare to our current prices. The following data set has 3 columns, 2 different exchange rates and a comparison versus November 2007 prices. The prices are in $/cwt.