March 28, 2012

Hog Producers Hurt by Rising Grain Prices

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

While grain farmers across Brazil are very pleased with the rising commodity prices, at the same time, hog producers are facing a bleak future with rising feed cost and slumping pork prices. The cost of grain accounts for approximately 70% of the cost of raising hogs and grain prices continue to rise to near record levels in Brazil. The prices of soybeans and soybean meal have appreciated more than that of corn due to the severe drought that has negatively impacted the 2011/12 soybean production in southern Brazil.

Grain prices are not expected to weaken any time soon unless farmers in the U.S. plant a record large corn and soybean crops and the spring and summer weather turns out to be very advantageous for the crops. Under that scenario, the 2012 U.S. corn and soybean crops could be very large thus putting downward pressure on grain prices.

An additional problem for pork producers in Brazil is the ongoing dispute with Russia concerning pork exports to that country. In June of 2010, Russia unexpectedly announced a ban on pork exports from the majority of hog processing facilities in Brazil. The official reason for the ban was that the sanitary conditions at the Brazilian facilities no longer met the Russian standards. Ironically, the USDA at about the same announced that Brazil had improved their standards to such an extent that they would be allowed to export pork to the U.S.

Brazilian officials have met with their Russian counterparts many times in an attempt to overcome their objections, but with very limited success. Brazilian officials have felt all along that the ban was strictly for domestic political considerations and had nothing to do with sanitary standards.

At the time the ban took effect, Russia was Brazil's largest pork importer, so when this market was suddenly closed, the warehouses in Brazil quickly filled with excess pork products. Domestic pork prices were driven down as a result and they have yet to recover.

For some time, pork producers in Mato Grosso have been selling their hogs at prices that are below the cost of production. The Mato Grosso Institute of Agricultural Economics (Imea) estimates that the cost of production is in the range of R$ 2.00 per kilogram live weight, but that the farmers in the state have been selling their hogs at R$ 1.75 per kilogram. As a result, producers are losing approximately R$ 0.20 per kilogram or about R$ 20 per head.

Farm organizations have petitioned the federal government to increase their efforts to reopen the Russian market and if that is not successful, to guarantee a minimum price for hogs that is high enough to insure that producers do not go out of business.