Hog Producers Seek Profitability Amid Market Volatility
Last year proved to be exceptionally challenging for hog producers across the United States, marked by significant financial setbacks. According to data from the Iowa State model, losses amounted to $31.56 in total for 2023. Factoring in data through September 2022, this figure would increase by an additional $15.82 per head sold during that time.
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Analysis of our swine operations database reveals a concerning decline in owner equity, dropping from 53% on December 31, 2022, to 45% on December 31, 2023. If we include data from the fourth quarter of 2022, total equity would have declined from its peak of 60%. Although year-end figures may have been influenced by tax planning, they do not reflect the steep losses experienced this far in 2024, details of which will be shared soon.
While working capital decreased, it remained above $940 per sow, as pork producers adjusted their balance sheets or explored alternative means to bolster liquidity. We remain committed to assisting producers in managing their balance sheets and capital structures to optimize liquidity, given the ongoing volatility in the industry.
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Despite the challenges of 2023, the new year brings a glimmer of hope. Decreases in corn and bean prices offer much-needed relief to producers’ cost structures. Anticipation mounts for April, when the transition away from high-priced corn is expected. At current feed costs, production expenses are projected to range between $76-84/cwt for most producers. Additionally, hog prices have rallied presenting an opportunity for profitability, a welcomed change after a prolonged period of losses.
The prospect of profitability, is a refreshing sight. Current futures prices for May through August suggest the possibility of significant profits, indicating a return on assets exceeding 12% and return on equity reaching 25%. Many producers have capitalized on market prices to safeguard profits while preparing for potential upside.
Yet, alongside the promise of profitability, the specter of margin calls looms. Producers have relied on Livestock Risk Protection (LRP) tools to mitigate risk and shore up weakened balance sheets. Despite these efforts, some producers have had to address margin calls to maintain hedge positions. We advise producers to maintain open communication with their risk management advisors and lenders, discussing their risk management plans and capital requirements to sustain them. Effective communication can facilitate access to capital during periods of market volatility, ensuring the resilience of risk management strategies.
As we reflect on the challenges of 2023, let us seize the opportunities before us. Through effective communication and prudent liquidity management, we can navigate uncertainties and realize our plans for the future.
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