ECONOMIC SITUATION AND OUTLOOK FOR THE NORTH CAROLINA
1998 is a year of financial losses for the United States swine
industry. North Carolina swine producers have suffered greater
losses than many due to the lack of packing capacity on the east
coast and the resulting exports of very low priced feeder pigs
and weaned pigs from the state.
Figure 1 illustrates the farm value, the wholesale (carcass cut-out) value, and retail value of pork over the last few years. 1998 is characterized by very large wholesale to retail margins, very low farm value, and farm to wholesale (packer) margins that have widened noticeably since June. Demand for pork is apparently very strong as most of the 9% increase in pork supply in 1998 is being consumed domestically with little change in retail pork price and with very large supplies of chicken and beef.
Export volume is up 40% through May while the value of pork exports
is up 15% and average price is down 15% (USDA). The largest percentage
increases in exports are observed in low valued products being
sold to Mexico and Russia.
Figure 2 illustrates the Iowa Southern Minnesota hog price and the benchmark "breakeven" cost of production for a North central farrow to finish farm (USDA). "Breakeven" costs are cash costs and exclude capitol replacement costs (depreciation) and the value of owner's labor. Hog prices have been below break even cost since December, 1997 and are predicted to remain below costs through April or May, 1999 or longer. As of October 21, 1998, the futures market offers no hog prices above $55 per 100 lbs. of carcass ($40/cwt. live hog) through April, 2000. Lower grain prices have reduced the breakeven costs low through spring, 1999.
A severe shortage of packing capacity exists on the east coast. North Carolina produced a pig crop of 18.1 million head in 1997 and slaughtered 9.3 million hogs (USDA). North Carolina, South Carolina, Georgia, and Virginia produced 20.6 million pigs and slaughtered an estimated 14.5 million head in 1997 (USDA). Allowing for breeding herd mortality and pre-market mortality of 7% to 10% of the pig crop, 7 to 7.5 million pigs were exported from North Carolina in 1997. Checkoff data shows 5 million slaughter hogs being exported from North Carolina in 1997. State veterinarian's data shows 2.1 million weaned pigs and feeder pigs leaving the state last year. Similarly, allowing for 7% to 10% mortality, NC, SC, GA, and VA exported 4 to 4.66 million pigs in 1997. The North Carolina pig crop is estimated at 19.1 million pigs in 1998; an increase of 1 million pigs from 1997. Approximately 4.5 million hogs per year are required to supply a plant processing 16,000 head per day.
Consequences of inadequate packing capacity may include reduced
local prices for market hogs and increased dependence on sales
of feeder pigs and weaned pigs. Preliminary analysis of hog price
data and anecdotal evidence from a wide array of hog producers
indicates that east coast prices may be 4% to 5% below prices
paid for identical hogs in Iowa Southern Minnesota region. Exact
differences are difficult to measure without price data from individual
packers across the country over some period of time. Price differences
may arise from the standard yield coefficient in pricing formulas,
from the "zero discount" range of backfat depth in the
pricing grid, and from differences in the premiums and discounts
for specific combinations of backfat and carcass weight in the
grid. Some examples follow.
Effects of Standard Yield on Hog Carcass Price
Carcass price = Base Price / Standard Yield
|Base Price||Standard Yield||Carcass Price|
Example of Effect of Zero Discount Range of Lean on Carcass Price
1998 is a very difficult year for all swine producers in North Carolina. Many of the most skilled independent swine farmers in the state have liquidated their herds or switched to contract production. Preliminary data suggest that the cumulative effect of lower prices paid for hogs on the east coast region may have exacerbated losses being incurred by swine producers across the country and contributed to the failure of otherwise sound swine enterprises. Lack of packing capacity and resulting lack of competition in the packing sector can cause lower prices. In my opinion, this situation is directly attributable to policies and political actions taken in North Carolina over the past few years. The long-run viability of many east coast swine farms may depend on added packing capacity. Current conditions are accelerating consolidation in the region.
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