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Swine production profitable now, but...

Oink, oink

Right now both independent and contract hog producers in Mississippi are making a profitable return on their investment. But there are concerns that the current growth in production in the U.S. could lead to a collapse in prices sometime in the next three years, a repeat of the devastatingly low prices seen in late 1998.

Many hog producers cut back production in 1999 as the industry lost an estimated $5 billion nationwide and saw the lowest prices in 50 years. After production went down, prices rebounded. Now the swine industry is back in the boom part of the boom-and-bust cycle, leading to fears of another price collapse somewhere down the road.

“As with any other ag commodity, you see production go up and down with prices,” said David Waide, president of the Mississippi Farm Bureau. “When prices get bad, people liquidate and that makes prices even worse.”

Waide said the supply and demand cycles of agriculture are just part of the business. But what makes it worse now is that so many of the major commodities are below profitable levels. So farmers aren’t able to offset losses in one crop with profits in another.

“Unfortunately, we don’t have much control over some of the factors that influence prices,” Waide said. “I think one of the things that will benefit all ag commodities, not just swine, is that we are seeing trade barriers eliminated in foreign countries. As we open those markets, we should be able to export more. Right now we export roughly a third of U.S. ag production. Our foreign trade deficit would be really tremendous if we didn’t have agricultural production.”

Since early 1999, hog prices more than doubled as the U.S. production shrank. Although 2000 production is down, farmers have an incentive to raise more hogs in coming years.

‘’We’re likely to have a lot more hogs in a couple of years, and there are signs that we won’t have enough kill capacity to handle all of them,” said Ron Plain, a livestock specialist at the University of Missouri-Columbia. ‘’We could be in a real mess again in a couple of years.’’

Mark Crenshaw, an extension swine specialist with Mississippi State Extension, said Mississippi lost swine producers in the 1998-1999 year due to low market prices. But total production has remained somewhat steady for the past several years.

“We haven’t seen a large growth in total numbers,” Crenshaw said. “There is certainly a concern in the future of exceeding packer capacity. That always has to be in the back of the minds of swine producers.”

While total production hasn’t dropped much, Crenshaw said the location of production has changed. In the past production was spread across the state primarily on smaller farms and now, as in most other states, production has concentrated more on larger farms. Production in Mississippi has concentrated near a packing facility in West Point.

Crenshaw doesn’t see a lot of future growth in the industry that had a total farm gate value of $33 million in 1999 in Mississippi.

“I don’t foresee any large growth in production in the state in the near future because of the financial situation,” he said. “I don’t think we’re going to have a lot of people get back in the business who got out in 1998. When you look at current feed prices and current cash hog prices, certainly people who are in business are in a positive cash flow. But what you have to look at is the amount of lost equity in the past two years in the hog market. Though they have managed to turn around the negative cash flow, they haven’t regained the equity they have lost.”

There are predictions that hog prices will be lower in the near future, perhaps at the break even point. Particularly considering concerns about exceeding packer capacity, there ends up being an incentive to be conservative about expansions.

“If you are concerned about exceeding packer capacity in next three years with the build up of capacity, will you be able to sustain cash flow in future years?” Crenshaw asks. “So I think you have producers across the country looking at long-term investment, and the expansion mode is probably not as great as some people would anticipate. I don’t think the numbers will build back as fast as some people anticipate. That’s because people have been hurt and lost equity.”

If that’s true, then production and hence prices may be more stable than has been predicted by some ag economists.

Crenshaw agreed with Waide that opening foreign markets could be a major boost to swine producers.

“A lot of pork is consumed in China, and we would certainly hope the opening of the Chinese markets would take care of some of the supply of pork produced in this country,” Crenshaw said.

Crenshaw believes that while there are challenges ahead, sound financial planning combined with the use of improved technology have the potential for making Mississippi swine producers competitive in the global economy.

Contact MBJ staff writer Becky Gillette at mullein@datasync.com or (228) 872-3457.


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