President, ComStock Investments (With Permission to Reproduce)
Copyright 2011@ CommStock Investments, Inc., David Kruse
Selling pork was profitable last fall. You couldn’t tell that by looking at producer margins as they didn’t receive a share of it. Packer margins reached $30 head at one point based upon the pork trade voluntarily reported by packers. Only 3-4% of the product trade is reported, likely the 3-4% that packers who voluntarily report, want reported, so the pork margin is likely even larger.
New reporting rules will reportedly expand pork trade reporting to 30-40% of total volume, which would be a little harder to manipulate. A lot of hogs are priced upon the sliver of pork trade voluntarily reported by packers. Very few hogs are traded in a true price discovered competitive market any more as one really does not exist. They turned boars who were independent hog producers into barrows some time ago.
The structure of the hog industry favors integrated producers today. I was amused to hear the NPPC use the argument against new GIPSA rules that they would force more integration upon the industry. How do you force integration any harder than when packers make $30 head and producers nothing? Believe me, Triumph Foods is going to build that new plant. It is the only way that they can make money from the hogs that they produce the way the current pork industry is structured today. Hog cycle upon hog cycle, the integration of packers owning hogs has advanced to the point that integrated producers control so much production they control the market.
They control both ends. They slow hog marketings so carcass weights set records controlling pork production so that they can sell pork profitably while keeping the hog supply burdensome. They make $30 head from pork processing using the hogs they raise while buying the few they do, cheaper. One industry insider who is a Pork Powerhouse says that Smithfield took the lead changing its market focus from being a hog producer to being a pork packer using integration as a lever to move the market rather than for diversification.
The problem is that independent producers are being squeezed to the point where the grapes become raisins. You can only juice them for so long before the industry structure changes again shifting toward full contract hog production as packers totally monopolize the industry. Independent producers are on their last legs with no future in an industry structured like this.
They are told that Ethanol is the cause of all their problems. Yeah, right! Producers were first terrorized with the threat of being denied shackle space for their hogs forcing them to contract with packers to have market access at all. The next step is for the integrators to control how much of the pork margin that producers get. They have proven this fall that the pork margin can be very good and they will keep it all. Independent hog producers are also being told to watch out for those new GIPSA rules as packers may not be able to pay what hogs are worth. Really! As if they are giving producers any of the pork margin now!
The new FTA with South Korea opens up that pork market to the U.S. Will the benefit of improved pork values go to producers or packers We have not seen it go to producers so the promise of pork export growth goes to the packer’s bottom line first and hog producers get what they are given.
I see the battle as lost. Nobody defends independent hog producers, not NPPC or IPPA anymore. In fact, the integrators are using those organizations to keep the hog producers in line where they want them. The packers love the status quo, so they don’t want new GIPSA rules to upset the racket they have established.
The argument that the rules will stop them for paying more for high quality meat rings pretty hallow against the example they set this fall where they failed to share value from pork with producers at all. Usually when they get caught stealing they let up on the market for a while so the tension subsides. We have had no interest in hedging hogs in an artificially depressed hog market. Producers have tried to make money from productivity but what this has done is maintain burdensome supply. The culling of sows has been offset by herd productivity so fewer sows still produce more pigs.
Pork is sold by the pound not by the head and record heavy carcass weights have kept pork production relentlessly high. Bulls see poor quality corn and heat impacting breeding programs last summer creating a hole in hog supply ahead. That could be, but they will push some marketings back into the hole. The hog industry is tied into production by contracts, so that it is difficult to really get bullish supply news anymore.
China is going to buy more pork next year. Dr. Glenn Grime’s domestic pork demand index improved late year. The hope is hinged on export demand growth and that packers will share pork margins with producers, at least enough to keep them in business as their indentured servants, if you call that hope. The hog industry is now solidly structured to give packers and integrators the commercial advantage over producers and they will continue to exploit it with the full force of their market power.DK
David Kruse is president of CommStock Investments,Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage. Mr. Kruse is also president of AgriVantage Crop Insurance and Brazil Iowa Farms, an investor owned farming operation in Bahia, Brazil. (Futures Trading involves risk. Past performance is not indicative of future performance.) For information on subscribing to the daily CommStock Report, contact: CommStock Investments, Inc., 207 Main St., Royal, IA, 712-933-9400, www.commstock.com. E-mail to: [email protected]