2007 in Review: A Changed Landscape
By Drew Ryder, Feedlogic Corp.
Like any industry, the U.S. pork industry has its predictable cycles. You can count on hog prices rising and falling at certain times of the year based on supply. Same goes for feed pricing. These predictable cycles have been very important for risk management in this business – the more certainty there is to pricing trends, the greater the opportunity to lock in future profits.
But as we look back at 2007, there’s general consensus among people who have been around this industry a long time that a number of factors may have changed the landscape permanently. Assessing your risk will take a new set of assumptions.
As you look at 2008 and beyond, what really awaits? Let’s look at the factors that will have the biggest impact.
1. The Ethanol Factor – There’s no question that the corn “gold rush” connected with the growth in ethanol production has created a new floor for both corn and soybean pricing. It’s also increased land values and made crop farming far more lucrative. A lot of corn was planted this year, but it seems unlikely the same amount will be planted in 2008 because of more attractive pricing for other grains. Demand for corn is expected to increase as more ethanol plants come on stream, creating further price pressure. If we have a bad year weather-wise, anyone who has locked in $4 corn will be looking real smart. Long-term, ethanol production has challenges and we are already starting to see margin pressure for many of the plants. But there was a lot of momentum behind them and with continued political support they still have a lot of air in their sails. If you’re a contract grower with plenty of land in prime corn country, raising pigs is becoming less appealing. Finishing space is still tight so it’s not hard to find contracts. But with feed prices rising, production efficiency is becoming more important for the integrators. What is it going to take to ensure that barn owners have an incentive to manage well? I expect integrators will be taking a lot harder look at contracts over the coming year.
2. The Currency Factor – A weak dollar has made the U.S. a very competitive player in global trade and at the same time made it very difficult for Canada. Record volumes of U.S. pork are heading overseas and will continue to do so as long as the dollar stays low. This fact alone has been key in the long run of profitable pig prices. Without it, we would have had a bloodbath in the last part of the year as all those pigs came to market. Yes, the profits have disappeared, but you could have been losing alot more because the industry could not have absorbed the huge slaughter volumes it saw. Where is the U.S. dollar headed? With the subprime mortgage mess still being cleaned up, don’t expect it to climb a lot higher soon. This will be good for export markets for some time and will help solidify pig pricing next year. The wild card is sow expansion. No one is saying a lot right now. If we see significant expansion next year, the results will be inevitable, low dollar or not.
3. The China Factor – Forget about the Beijing Olympics – that’s just a side show. The real question about the world’s largest pork consumer and producer is how quickly its middle class is growing. The average Chinese consumer will eat more pork as income rises. We are seeing this trend occurring already. How quickly pork demand will grow in China will depend on the country’s ability to sustain its current rate of economic growth and the government’s willingness to allow unfettered capitalism. A lot of U.S. corporate giants have big expectations of China because its sheer population presents such a huge potential market. And we have already seen that Chinese consumers act just like U.S. consumers if they have the ability to buy. If the current economic and political structure stays in place, look for growing consumption. And that can only be good for the U.S. pork industry.
Drew Ryder is president and co-founder of Feedlogic Corporation. Feedback: dryder@feedlogic.com.
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