MAJOR TRENDS IMPACTING THE PORK INDUSTRY
Jul. 17, 2017
By Betsy Freese, Successful Farming magazine
The swine industry is going through a seismic shift in 2017, says Mark Greenwood, senior vice president, Compeer Financial (formerly AgStar), in Mankato, Minnesota. Greenwood works with many of the largest U.S. producers, helping them track production and financial numbers. He gives these seven key changes taking place in the pork industry right now.
1. New packing plants will change the industry.
Five new plants, plus a plant expansion, are being built for a reason, says Greenwood - packers' margins have been very good for an extended period of time. Thus, producers want in on the action. "Large packer margins have caused a reinvestment into more processing," he says. Here are the plant locations:
• Rantoul, IL - Expansion
• Pleasant Hope, MO - 3,000 head per day
• Windom, MN - 5,000 head per day
• Coldwater, MI (Clemens Foods) - 10,000 head, single shift
• Sioux City, IA (Seaboard Triumph Foods) - 12,000 head, single shift
• Eagle Grove, IA (Prestage Foods of Iowa) - 10,000 head, single shift
The capital investment to build a packing plant is smaller than the investment needed to supply it. It takes about $500 million to build a plant compared with $1.7 billion to build the production system to raise the pigs to supply the plant (not counting land). Being good at processing doesn't mean you'll be good at production, and vice versa, says Greenwood.
"The Triumph Foods group changed the dynamics, and now others are looking at trying to replicate," he says. "But it wasn't that easy." The Triumph plant in St. Joseph, Missouri, started up in 2007 when the swine industry was strong and corn was cheap, he explains. After starting, the company experienced a plant explosion and employment disruption. By 2008-2009, the swine production industry experienced $25 per head of losses for over two years, as well as death loss from the H1N1 virus. There were sow buyout discussions. The challenges of that time strengthened the industry, says Greenwood.
"Triumph was ultimately successful, but it was not easy."
2. The swine industry has little debt.
Producers are making a little bit of money this year, says Greenwood, and the past few years of profit mean a financially sound industry. "A lot of systems paid off all operating debt," he says. "The majority of our larger clients have their real estate revolving debt paid down and 80% of real estate debt paid, too. Many systems could lose $20 per head for two years and not touch their operating lines other than for tax purposes."
However, don't rest easy. "If you think you are strong, there is somebody stronger," he says. "You cannot get overconfident."
3. Producers are adding sows.
"We are going to add 5,000 sows" is a common statement from his clients this year, says Greenwood. "When you have a strong balance sheet, you tell your lender what you are going to do!" Industry strength of this level has led to capital spending or reinvestment into production. This time, the focus is on production plus packing plants.
4. Not enough pigs are negotiated on the open market.
It's now 2.5% and it needs to be 10%, says Greenwood. "People don't do it because they say, 'Man, that's hard work,' and 'My lender wants me to have everything on contract.' Yes, it is hard work, but the cash market drives what happens on the futures market. The industry needs a larger amount of pigs sold on the open market."
5. The single biggest risk to this industry is one word: people.
We need more people working in the food chain system, including packing, veterinary medicine, and production, says Greenwood. Labor is a real problem for agriculture. Producers need to continue investing in new technology and finding ways to retain employee talent. "Think for the long term, not the short term," he advises.
6. The U.S. is producing world-class pork.
Europe used to beat us on pork consistency and quality, but production, processing, and overall infrastructure in the U.S. has improved in the past decade, says Greenwood. "Financial and operational excellence has become standard the past few years. There has been tremendous risk management by producers." A continued improvement in overall production, including pigs per sow per year, has been almost across the board on farms.
"The pork industry is the best in agriculture at comparing notes with peers," says Greenwood. "That's very unique and makes them the best in the world at what they do. Continue to benchmark against your peers to understand where you stack up."
One question to ask is, as producers increase supply and integrate into packing and processing, can we keep our high values? "Use data to drive decisions for your operations," says Greenwood. "Embrace data management; use data to make decisions that add to your bottom line. Be willing to change current practices for overall improvement. Avoid the status quo."
7. Any disruption to our export market will be devastating.
We will be even more dependent on exports with the new packing plants coming online.