Sunday, 14 May 2017

Pig Prices Continue To Rise, Spain Is Larget Exporter In The World

It’s the month of May, usually from May till September is hog producers time to get higher prices and generally have the most profitable period of the year.

Both summer lean hog futures and cash prices have appreciated recently. Average Producers should be at about breakeven right now but at current summer lean hog futures and feed price average producers should have profits of $30 plus per head in the weeks ahead. Better times are just about here.

Spain

Last week we were with Spanish producers. Spain is the third largest hog producing country in the world. Currently the Spanish hog market is 1.355 Euro/kg liveweight or 66¢ U.S liveweight a lb. ($165 per head).

Profits running about $30 U.S per head. Good profits. Pork cut-out wholesale price similar to U.S (78¢ lb.). In Spain packer cut-out margin has been significantly lower then USA. Spain has excess packer capacity relative to USA. That’s the reason they have a lower Packer kill and Gross Margin.

Competition for hogs is good for swine producers.

Spain has been quite successful in capturing the increased pork volume that China has required. Part of that reason Spain was stopped from shipping to Russia a year before the rest of Europe was sanctioned. The necessity to find markets got them to China and when the need arose in China for more pork they were ahead on business relationship development.

Spain has traditionally been a major user of Piétrain. Lean Pork with traces of marbling was the main product. With the growth of China and other Asia Export markets, Spain has reacted to Asian customers demand and moved to using more Duroc Boars to increase taste and flavor.

Over the last four years Genesus Durocs have continued to grow in demand in the Spanish market. When we first went there, we were told we were crazy as Spain would only use Piétrans.

We don’t have Piétrans, we are all in for Durocs. We believe all consumers want better tasting pork. Spain Genesus Duroc use continues to grow and we expect this to continue as the demand for better taste is expanding domestically and in export market.

In Spain the Prime pork cut is Ham. Totally contrary to the U.S where Ham languishes at half the price of bellies. In Spain Ham is king. Hams are dried and cured up to two years. Prices can reach near $1,000 U.S for a single Iberian Ham. The Ham is delicious.

Duroc bred to Iberian is becoming very popular and there is a push to purebred Durocs as a market hog program to produce a premium product. Its kind of amazing the rapid evolution from Piétran to Durocs as the recognition accelerates on the difference in taste and flavor and what it means in the marketplace.

Spain has several integrators led by Vall Companys with 206,000 sows. Vall Companys is the largest European owned swine producer. The model most integrators follow is to own the sows provide the feed, producer gets about 12 euros ($13) per head to provide building-labor.

The pigs then go to contract nurseries and finishers where integrator owns all pigs. Integrators such as Vall Companys have there own packing and processing.

Integrators do not own barns in this model. Integrators take production risk but have no capital deployed in owning swine buildings, land, manure disposal.

Spain is posed to continue to grow. More Packing plant capacity of 6 million head a year is just being completed or underway. The integrated model of contracting seems to work in Spain as producers with buildings are comfortable to produce without taking price risk.

Spain doesn’t have many Globally competitive industries. The Spanish swine sector is an exception. Its obvious Spain’s swine industry has had good leadership and with that a competitive collaboration.

A real example of this is the weekly meeting in the city of Lerida where Packers-Integrators-Producers get together and work to establish through consultation and collaboration an agreed national price for market pigs.

Nowhere else is this done, we doubt if it would be possible anywhere else. Unique but it works.

Russia

Pig price currently is currently 110 Roubles per live kg ($1,92). For good farmers, pigs continue to be very profitable, but for many not! according to Simon Grey, General Manager Russia, CIS, and Europe.

Some are even losing money incredible though it seems. I was asked a week or so ago, why when Russia has low grain cost (wheat at 8900 Roubles ($156) per metric tonne), low labour cost (about $500 per month) and low energy cost (petrol $0.56 per litre at the pump) why are costs of production so high?

Russia wants to continue to grow its pig industry and become a net exporter. For me this is a very sensible ambition. Russia has a massive land bank and can produce a lot more grain.

There is a lot of land to build farms on and of course use for slurry disposal - as a valuable organic fertilizer that can increase crop yields.

There are today a lot of skilled pig farmers who can get globally competitive production results.

One major obstacle to this happening is a high average cost of production. When you want to trade a global commodity like pig meat, you need to be globally competitive on cost.

In any commodity market the lowest cost producers have the advantage.

Having grown up within the European pig industry and also having worked for the world’s largest pig producer it is very easy to see where the extra costs are:

1, The first is excessive legislation, most of which comes from the USSR. In soviet times, everyone had to have a job. State farms were created to feed and occupy people, not to be profitable.

There is some modern legislation that seems to originate from the EU. As far as I can see, the EU is steadily legislating its pig farmers out of business, with more and more rules that simply add to cost of production and ultimately only put up the cost of pork for the consumer!

This excess legislation is the cause for many high costs. Just last week I was at a farm that was set up in Soviet times. There were over 400 people working with 7000 sows! The total salary cost per pig produced was considerably higher than either Europe or North America.

The administration costs, directors, accountant’s lawyer’s etc. was in excess of $9.00 per pig sold. I would be targeting $1per pig, even taking into account the excess administration in Russia a maximum of $2!

Excess legislation adds to the cost of everything. Farms are expensive to build (despite low cost labour and building materials). The process of getting permissions is expensive and slow. Getting bank loans is administrative and complicated.

2, The “I want” culture. Having spent a lot of time in Russia over the past 12 years I observe many spoilt children, especially boys, spoiled by their mothers! They learn from an early age that they can get whatever they want. This behaviour follows some into their working lives. Spoilt children never learn the real value of something.

When designing farms, ‘I want’ adds to the cost. When deciding on feed ingredients or medicines or other supplies, I want’ adds to cost. When deciding on how many people and salaries ‘I want’ also adds to cost.

3, Inability to take decisions. This is caused by the punishment culture that comes from Soviet times. Mistakes were punished, success ignored. Still today if something goes wrong on a Russian farm, it seems to me that 99% of the effort is put into finding who was responsible, rather than sorting the problem.

Fear of punishment means many managers daily focus is avoiding mistakes and trying to find someone to blame for anything. I have been on farms many time and asked manager for a simple production report. Many time I have been told, sorry I can’t, the data in-putter is on holiday today and only she can print reports.

My response, but you are the manager, surely you have access to information and can run the management program? Answer, no its not my job!

The inability to make a decision means its easier to change nothing, than risk changing something. Therefore, nothing changes, production stays the same and inevitably costs rise and rise!

Taking decisions is very easy. Good decisions increase profitability (more sales or lower cost or both). Bad decisions reduce profitability (less sales or higher cost or both). Managers by definition, are employed to manage, this requires taking decisions on a daily basis! A calculator is usually all you need to decide is a decision is good or bad.

4, Subsidies and protected market. Both have an important place in helping to establish business, but only as a catalyst (the business has to be profitable without the support, otherwise it is a rally bad idea to subsidise).

Ultimately however subsidies do nothing to help companies become globally competitive. They do help to keep inefficient and poorly business profitable!

5, ‘Russians like suffering’ is something I am often told. This is something that has made Russia what it is today (we need only look at how Russia dealt with the German invasion in the 2nd world war.

The ability of Russian people to put up with poor work and living conditions, low salaries, poor quality food, bad service, is incredible! I hear so many times “its Russia”.

Accepting what has always been and nothing will change stops real development.

In Russia is see some very clever business owners that want to get on and create excellent globally competitive business. I see many very clever young managers who understand the problems of high cost and who get very frustrated being desk bound filling in forms, rather than being on farms producing more pigs. I also see many skilled production workers on farms who are more than willing to do more and earn more money.

Russia could easily double (and maybe triple) its pig production and not hire a single person!