Challenges Build on Both Sides of the Profit Equation

 

By Dennis DiPietre and Lance Mulberry, FarmJournal's Pork 

May 9, 2022

 

After a period of profitability following the two years of COVID-19 challenges, we are starting to see some dark clouds on the horizon. Challenges are building on both sides of the profit equation: costs of production and sales revenue. Layers of uncertainty are in the air, and even if some of them were resolved today, their impacts will continue for months.

 

The coming risks are on both sides of a decision-making teeter-totter that could drop on either side of the fulcrum. Other unprecedented things are happening like high inflation and the highest value of the dollar against key foreign currencies in years. Exports depend on U.S. pork being competitively priced.

 

If you want to go to bed sure about the coming year, I refer you to the words of Justice Oliver Wendell Holmes, who is supposed to have said, “The longing for certainty ... is in every human mind. But certainty is generally illusion.”

 

First, the more certain thing is the high cost of production, which will be with us until the U.S. producer of feed grains delivers up a record-breaking crop. That seems unlikely since the cost of production for the feed grain producer, especially to produce nitrogen-hungry corn, is turning away from corn on the margin to soybeans or other alternates. Even if corn is produced, where hog manure is not available, the yields will likely be less than record level since the economically smart thing to do is to reduce nitrogen use through one of several substitutes which don’t deliver the same punch such as using chicken litter (which is potentially a source of the spread of bird flu) and various tillage practices like strip tilling to increase efficiency of applied fertilizer.

 

The war in Ukraine has severely messed up significant sources of nitrogen exported from the region. Retaliatory actions by the Russians, such as cutting off natural gas supplies to some Eastern Europe countries, means the raw materials for nitrogen fertilizer production (natural gas) that may have been available will now be diverted to alleviate some of this and/or hoarded against the prospect of a coming winter without heat for millions. Even if the war was over tomorrow, it would be months or years before anything “normal” returns. Layer on top of this, the continuing port disruptions and the emerging fifth wave of COVID-19 and there is no balm in Gilead. This will mean producers of all meat animals will be reducing production at least by weight...

 

Will hog prices remain high? ...

 

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