Sioux Falls, SD - As hog prices have plummeted to record lows over the last several weeks, farmers across the Midwest have plunged into a state of crisis.
Farmers with average-size hog operations are losing $1,000 a day or more, according to several estimates.
Several factors have combined to push prices down, including a record- setting supply of hogs -- up 10 percent over last year, far more than anticipated -- and a sizable reduction in packing plant capacity. The glut of hogs available for slaughter means packers can pay rock-bottom prices.
The result is that the cost of raising and selling hogs -- including feed, labor, buildings, veterinary care and transportation -- exceeds the prices farmers are being paid by $50 to $75 per animal.
With that kind of red ink, farmers in Iowa, Illinois, Indiana, Minnesota, Oklahoma, Nebraska, Missouri and Wisconsin are having difficulty buying feed for their animals, much less paying off debts they've taken on to build new facilities or buy new equipment.
Bankers have come calling, and foreclosures have become a distinct possibility for financially weak operations.
Contract arrangements between farmers -- such as set-price agreements for one farmer to breed hogs and for another to raise the animals after they are weaned -- are breaking down because farmers can't afford to keep up their end of the bargain.
Even farmers being paid above-market prices for hogs under existing agreements with meat packing plants are in trouble. The difference between what they're receiving and current market prices is being booked to their accounts to be paid back at a later date, becoming the farming equivalent of high credit card debt.
"The situation we're seeing is not just bad, it is catastrophic," said Chris Hurt, an agricultural economist at Purdue University.
He noted that current hog prices, adjusted for inflation, are the lowest in U.S. history.
The last time hog prices dropped to current levels -- between $14 and $17 per hundred pounds in Illinois, based on Wednesday's market quote from the U.S. Department of Agriculture -- was April 1964. But adjusted for the effects of inflation, current prices are at least one-third below those previous lows, while farming expenses are much higher.
"This is beyond any experience we've had in the last several generations," Hurt said. "All previous benchmarks do not apply."
He estimates that hog farming losses in Illinois alone will come to more than $1.5 billion this year, and will create an economic ripple effect in rural communities across the state.
The current situation is a direct outgrowth of hog farming's better years. For most of the last decade, this segment of agriculture has been highly profitable, encouraging farmers to raise more and more animals.
Eighteen months ago, hog prices were around $60, fueling expansion fever.
Especially vulnerable are younger farmers, who don't have a lot of equity built up and who have invested heavily in modernizing their operations so they can produce leaner pork and compete with the large, technologically sophisticated companies that have become an increasingly dominant force in hog farming.
One is Shane Boothe, 31, who produces about 440 hogs each week on his farm in southwestern Oklahoma, where he also grows wheat and corn. Over the last several years, he's sunk $1 million into new facilities that cannot be used for any other purpose but raising hogs.
"In past years, when hog prices were down, maybe cattle or wheat or corn was up. In this situation here, nothing is making money," Boothe said.
Unlike corn or grain farmers, hog farmers can't store their products until the market recovers. Once the hogs reach an optimal size of about 250 pounds, they have to be slaughtered to make room for other animals coming through the pipeline.
There is little hog farmers can do to adapt to the current economic crunch except try to keep costs low, breed fewer hogs, get rid of inventories or get out of the business altogether.
All are being tried, and the result will likely be fewer farmers and more consolidation in the hog business, according to Ron Plain, professor in the University of Missouri's department of agricultural economics.
Max Schmidt, a 55-year-old farmer who raises corn, soybeans and hogs on his 2,000-acre farm in northeastern Iowa, makes the economics of the situation very clear. For every hog he raises, it costs him more than $105 in breeding the animals, feed, utilities, labor, building expenses, veterinary costs and transportation.
But the semi-trailer of hogs he brought to the packer Monday went for $18 a hundredweight, or $44.10 per animal for a 245-pound hog.
"My lender is coming (Tuesday) to ask what we are doing about the situation. The truth is, the equity I have in my land is being consumed right now," Schmidt said.
Rich Brauer, who raises 60,000 hogs each year on his family farm 30 miles northwest of Springfield, Ill., has a similar problem. On average, he sends out three semi-trailers of animals to packing plants each week. Last week, his losses on each truckload came to $10,000, or about $30,000 total.
"No one thought it would get this bad," he said.
Calling the situation an "economic disaster," the Des Moines-based National Pork Producers Council asked President Clinton to intervene. Among its recommendations were removing a production cap on the world's largest slaughter plant in North Carolina, relaxing immigration restrictions that make it difficult for packers to hire labor, asking federal financial institutions to work with farmers, and making available emergency or disaster loan guarantees.
Andy Solomon, a spokesman at the Agriculture Department, said, "We take very seriously these suggestions and want very much to help."
On Monday, the department announced it would buy an additional $50 million of pork for school lunch and other federal food programs.
For farmers, the big question is when hog prices will rebound.
To help ease the current bottleneck in production, meat packers have begun running their operations on Saturday and even Sunday, and adding more shifts. Farmers this quarter began reducing the size of their hog herds, the impact of which should be felt 10 months down the line. And the National Pork Producers Council has stepped up efforts to promote pork at the meat counters in supermarkets through a major couponing drive.
Those steps could help hog prices approach break-even levels by next summer, said John Lawrence, extension livestock economist at Iowa State University.
For consumers this holiday season, they could mean better bargains on Christmas hams.
But generally, retailers have not lowered the price of pork products this year; instead, they've pocketed substantial profits from pork sales, according to industry sources.
Retailers now receive 60 percent of the sticker price of pork, up from an average 47 percent between 1986 and 1998, while farmers' share of the dollar has fallen to 21 percent from 37 percent.
Meat Industry Insights News Service
P.O. Box 553
Northport, NY 11768
Phone: 631-757-4010
Fax: 631-757-4060
E-mail: sflanagan@sprintmail.com
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