Pork producers: Time to focus on competitiveness

PORK producers are emerging from a nearly three-year-long tunnel of what was a horrendous market situation -- first being caught hard by extraordinarily high corn and feed costs, second by the worst economic recession since the great one and third by a novel form of human influenza that was misnamed "swine flu" by much of the general media.

The first issue meant that even with hog prices near record levels, producers could not cover production costs and lost money.

The second issue meant that consumer demand shifted to lower-priced pork cuts and even shifted out of pork to lower-priced poultry, so producers had to sell hogs at cheaper prices to sell
pork at cheaper prices and lost money.

The third issue prompted the closure of several critical export markets as consumers outside the U.S. associated the A/H1N1 influenza with hogs and pork, and producers, again, had to sell more hogs in the U.S. at cheaper prices to sell more pork in the U.S. at cheaper prices and lost money.

Producers took their third-greatest loss ever in 2008 and their second-largest loss ever last year, and the drain on equity has been historic -- so much so that another shock will be industry rationalizing.

"The hole is so deep that we could lose producers if something else happens," said Neil Dierks, chief executive officer of the National Pork Producers Council (NPPC).

Pork production finally returned to profitability in April, but it will take months for producers to redress their equity, he said.

Accordingly, producers at the World Pork Expo in Des Moines, Iowa, this week "will be thinking about where they have been and where they are going," he suggested.

To understand where the industry is heading, Feedstuffs recently talked with Dierks and National Pork Board CEO Chris Novak at their offices in Des Moines.

Competitive licenses

"So, here we are," back into profitability, Dierks said in comments that were focused extensively on keeping producers and pork production competitive.

Pork must be competitive and competitively priced against other proteins and globally, he said, "and this will play out in several ways."

Competitiveness will drive efficiencies, and competitiveness will drive production of high-quality, safe, readily available, convenient and versatile pork products, Dierks said.

Despite the current economic situation surrounding national debt in Greece and other parts of Europe, the world economy is rapidly recovering, and U.S. pork exports are projected to increase this year for the 14th of the last 15 years and total almost 20% of production, he said.

So, there are lots of opportunities for pork producers, Dierks said. "It all comes back to being competitive."

How producers care for their animals, communities and the environment and the ethics and moral responsibilities they demonstrate also represent opportunities for producers, Dierks said.

Producers must earn economic and social licenses to produce, he said. "It all goes into being competitive."

Dierks acknowledged how pork producers have decreased hog production 4% this year and have, therefore, decreased pork production 4.5% this year. These cutbacks, combined with increased pork exports, have significantly decreased domestic pork supplies, forcing higher prices on consumers -- at least once retailers pass through those prices.

That's a dilemma, he said: Pork needs to be competitively priced, and demand for food is increasing, but producers' actions are decreasing the supply of and increasing the cost of pork.

However, Dierks said producers must get higher prices for hogs to cover costs of production and remain in business -- a strategy that is consistent across other protein sectors. "If we can't get higher prices, we can't produce," he said.

Furthermore, the U.S. is the lowest-cost pork producer in the world, which continues to make U.S. pork a good price value domestically and internationally, he said.

Idling on trade

As food demand increases -- Dierks noted that China's middle class will be as large as the entire U.S. population by the end of this decade -- opportunities to be competitive through trade also increase.

Pork exports account for $30 per head of the price of hogs, he said, making trade a positive for producers but also for jobs and America's rural communities and beyond.

However, trade doesn't take "time-outs," Dierks said, and pork producers need opportunities to engage in free trade, as represented in the pending trade agreements with South Korea, Colombia and Panama, which would add another $10 per head or more to hog prices and create even more jobs and economic activity in rural America.

Unfortunately, and despite President Barack Obama's call for the U.S. to double its exports, congressional action on those trade agreements has never gotten off the ground. Frustrated with U.S. inaction, Korea, Colombia and Panama are now negotiating trade pacts with other countries because "we are sitting there idling," he said.

Dierks admitted that with the U.S. industry now selling 20% of production abroad, U.S. producers need to be just as aware of the adverse effects of losing export markets as the benefits of gaining export markets. Exports have "high opportunities and high risks, and we need to be conscious of those risks" and manage them, he said.

Wheel to use

Demand for U.S. pork domestically and internationally depends on the health of the herds and on animal identification and traceability, Dierks said.

A contagious disease can quickly close export markets, he said: "Look what happened with H1N1, and that wasn't even a contagious disease" or a disease related to hogs and pork.

Dierks noted that 85% of all hog premises are registered, and the industry is prepared to conduct 48-hour traceback in the event of a disease or other public emergency -- the goal of the defunct National Animal Identification System (NAIS), which the U.S. Department of Agriculture is replacing in favor of a concept for individual state and tribal systems (Feedstuffs, Feb. 15).

He said NPPC is working with the Pork Board, states and tribes to make sure that what pork producers put together in NAIS is kept in the new system. The critical infrastructure already is in place to rapidly trace back swine to their farms of origin to contain disease outbreaks to an appropriate area while allowing other parts of the country to remain in commerce, he explained.

"We don't see any need to reinvent the wheel," Dierks said. "We have the wheel now, and when the time comes for each state and tribe to have disease traceback in place, we hope it's (our) wheel they use."

Competitive phenomenon

Dierks said the negative period through which U.S. pork producers have just gone wasn't like the market collapse in 1998-99, which was a consequence of overproduction -- more hogs than packer capacity to run. From late 2007 into this year, he said producers experienced shocks from input costs, recession and the unfortunate consequences of H1N1.

He said bankers need to be commended for holding the production sector together during the 2007-09 period.

"As terrible and ugly as it was, we only retrenched by 5 million head. Five million head is a packing plant. It could have been 10 million," Dierks said.

"So, some credit needs to go to the financial sector," he said.

Now, the economy is recovering, retail demand is good and restaurant demand is returning, Dierks said.

Prices are increasing for hogs coming into packing plants and for pork going out, and "now, we move to the next phase to find out how consumers will react," he said. "Will they pay higher prices or push back?"

Dierks said the industry soon "will get a sense of that."

He said it's his opinion that hog and pork prices "won't get outrageous," that hog prices will be high enough to cover costs and provide some profit but that pork prices won't be too high for consumers. He went back over the quality and safety attributes of pork and said pork represents "a phenomenal value."

Competitive economics

Dierks was asked -- if demand is improving and if prices and profitability are improving -- how fast producers might be tempted to expand.

First, he said, the 2009 corn crop came in wet and has slowed gain to the point where producers are using all of their finishing space to feed hogs that are off schedule, as well as new pigs that have come into barns on schedule.

As slowed-down hogs are marketed, a higher-quality 2010 corn crop will get finishing operations back on schedule, which actually will give producers more space to expand using existing facilities, he said.

The only building now is to improve efficiencies -- combine two old sow facilities into one new operation, Dierks said, and reports that buildings are going up are not reports that producers are expanding. However, improving efficiencies does provide expansion opportunities, he added.

At the same time, Dierks said producers have made substantial investments in their operations and are not willing to "de-scale" those investments, which means producers will seize expansion opportunities to use those investments.

Animal rights and environmental activists have succeeded in slowing or stopping expansion -- if not production outright -- in several states, he said, so there will be certain "geographic dynamics" in the years to come.

However, expansion will be driven by economics, Dierks said, and the economic signals will indicate if and when expansion is advised.

Competitive decisions

The industry's competitiveness and expansion signals will also be affected by the way producers conduct their businesses, Dierks said in reference to the competition hearings being conducted by USDA and the U.S. Department of Justice.

There is concern that the government could do something that would make the industry less competitive, which "consumers would also pay for," he said.

People, including consumers and government policy-makers and regulators, tend to define industry marketing practices and structure as something that was designed on purpose, he said, but they actually represent the consequences of lots of producers making individual decisions in response to economic signals.

For instance, the industry structure changed significantly in the aftermath of the 1998-99 market collapse as what had been a lack of shackle space sent signals to producers to find guaranteed shackle space, Dierks said.

Producers went to packers and suggested agreements in which they could market their animals at prices that would be determined by certain parameters -- feed costs, Iowa-Minnesota hog prices, futures markets, etc. -- and packers were amenable to those agreements, he explained.

This wasn't "a conscientious design ... but the marketplace doing what the marketplace does," he said.

This is why there are discussions now about how to price and sell hogs off other signals such as wholesale or even retail pork prices, he said.

However, if the government concludes from its competition hearings that producers have to market and/or packers have to purchase hogs -- or a certain percentage of hogs -- in a particular way, it would limit producers' options and risk management, Dierks said.

Producers have to have "freedom to make their own business decisions," he said.

Dierks said there are only four regions of the world where agriculture can produce enough food for the world's growing population: the U.S., western Canada, the Argentina-Brazil section of South America and Eastern Europe.

In the U.S., agriculture has the infrastructure in place to produce an abundant and affordable food supply, he said.

Producers also are trying to earn the social license to produce that supply through animal care, environmental sustainability and food safety practices, he said, and now, policy-makers and regulators are questioning those values.

"The ramifications are critically important," Dierks said. They will indicate the industry's ability to expand.