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Decision Time for Livestock

Forward contracting corn during the rise in grain prices has delayed the pain for livestock producers, but as time passes the reality of feeding corn at nearly $6 per bushel is settling in.

While grain producers are enjoying this unprecedented run, livestock producers are being forced to a new reality in feed costs that seemingly has no end in sight. Competition worldwide for U.S. feed grains - driven not only by bio-fuels production but also global demand and the cheap U.S. dollar - has corn futures trading in a range around $6 per bushel into the far horizon.

According to the Kansas Pork Association, the Kansas pork industry alone is losing an estimated $10 million in equity each month. The National Pork Producers Council (NPPC) says that the nation's pork producers have lost more than $2.1 billion.

On the cattle side, feeding losses have dipped into the red about $160/head for the first quarter of 2008, with the second quarter expected to be similar, according to James Mintert of Kansas State University. According to Brad Palen, a Manager at Kennedy and Coe's Salina office, breakevens in hogs are nearing $80/cwt carcass weight and will continue upward as feed costs increase.

Feed costs are 60% of total cost for farrow-finish operations, with the percentage going higher as feed prices increase. Given about a twelve bushel consumption of corn per head to produce and take a market pig to 270# live weight, each $1/bushel swing in corn price translates to about $12 per pig, or an impact of around $6/cwt of the carcass weight.

Losses in the neighborhood of $35-$45 per pig have been common for the last couple quarters. The recent upswing in market prices for hogs will help to reduce these losses somewhat, but not enough to erase them.

Price increase coming?
Eventually hog and fed cattle prices will rise again above feed costs, and profitability will return. Meanwhile, production will have to decrease if that equilibrium is to be found. But among livestock producers, who is going to blink? Who will exit the business and re-direct capital elsewhere while the industry works through its challenges, and who will remain to be in production when profitability returns?

Chicken producers are losing money but demand remains strong, and one major producer plans for no cutbacks in production. Tyson CEO Dick Bond, in spite of calling for ethanol subsidies to be rolled back, announced recently that the company would continue with capacity production.

According to USDA, cattle on feed on April 1 was higher than 2007 for the fifth month in a row, and the second highest since the data series was established in 1996, even given a significant drop in placements in March. Last month the Canadian government moved to pay Canadian pork producers $50 million to kill off 150,000 pigs by fall. The animals are being slaughtered at plants and on farms, with a goal of reducing the swine breeding herd by 10%. Most of the meat will be used in pet food, with a smaller percentage going to food banks in the country.

In the U.S. no such program has been announced, but the industry did recently ask USDA for assistance. Officials from NPPC met with the Ag Secretary recently and urged him to take "immediate action" to help soften the economic crisis in the hog industry. Among other steps, they asked USDA to purchase 50.5 million pounds of pork to use in federal food programs.

Managing your future
So what should livestock producers do next? Consider some or all of these eleven ideas:

• First, know your cost of production to determine how competitive you are with your peers, says Palen. Only the strong will survive this cycle, and the weak will be forced out. Without effective cost information you won't know if you're among the former, or the latter.

• Develop cash flow projections with sensitivity analysis to see if you can withstand the potential setbacks, and for how long, before the cycle turns again in your favor.

• Stay in close communication with your lenders to make sure their interest level and commitment to financing during a period of losses is the same as yours.

• Monitor feed conversion ratios and review strategies for improvement.

• Evaluate your labor force with an eye toward identifying key personnel you'll still want on board in the next cycle, says Palen.

• If you're producing pork, consider selling lighter weight market hogs and more aggressive culling of market hogs to optimize net selling prices, suggests Palen.

• Consider culling less productive breeding stock and either maintaining a lower population or repopulating with higher quality genetics.

• If your feeding efficiency is excellent, consider doing some custom feeding to help manage operating losses while continuing to offset fixed overhead costs.

• Discuss long-term strategy, and what your business will look like on the other side, and whether you have reason to believe it will have the legs left to continue.

• Is the time right for a contrarian move, by seeking to buy out less competitive operators and expanding market share during this downturn?

• Perhaps most important of all, involve all stakeholders in the operation, and all of the outside advisors that you value, to make the best decision for your business.

Whether it involves attempting to survive current losses, or reallocation of capital elsewhere, the best decision will be the one most likely to lead your organization and your people to the long-term success you seek.

- Greg Wolf is an agriculture consultant for Kennedy and Coe LLC, a top Midwest-based accounting and consulting firm. He works with clients in financial analysis and benchmarking, strategic planning, and other consulting projects.