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 capital replacement costs (depreciation)
and the value of owner's labor. Hog prices have been below breakeven
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 cost and are expected to keep
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 the 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.
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 in 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.