Profit cycle

This guide considers the long-term trends of historical data (Queensland pig carcase prices and feed prices from 1987).

Two indicators of net returns in the pig industry are examined: the margin over feed cost and the pig meat price to feed price ratio.

Margin over feed cost (MOFC)

The MOFC is obtained by deducting the cost of feed to produce 1 kg of hot standard carcase weight (HSCW) pork from the average pig price.

The amount of feed to produce 1 kg of HSCW pork is arrived at by using a herd feed conversion ratio of 4.15:1, which has been kept constant for the whole period from 1987. No allowance is made for improvements in productivity over time.

The MOFC is adjusted for inflation, to show what is happening in real terms, i.e. equivalent to today's dollar. The MOFC is expressed in the latest month's dollars, using the consumer price index (CPI) (for Brisbane, sourced from Australian Bureau of Statistics). For example, in September 2000, the MOFC was 117.96 c/kg, which at that time bought the same amount of goods as $1.61 buys 10 years later in 2010. The 'real' margin in September 2000 was $1.61 c/kg in 2010 dollars.

The graph in Figure 1 shows the real MOFC. It has fluctuated widely between peaks in late 1990 and 1993, the summers of 1996/7 and 1999 into early 2000, summer of 2001/2002 and the first half of 2009 and low points especially during 2003 and 2004 and during 2007 and 2008. The average margin since 1987 is approximately 122 c/kg.

Pig meat price to feed price ratio

The price of pig meat, in c/kg HSCW, is divided by the price of feed, in c/kg, to find the ratio between them.

From Figure 2 you can see that similar to the margin, the ratio has fluctuated widely. The average ratio for the period from January 1987 remains steady around 7.0.

The bacon and feed prices, in real terms, since 1987 are shown in Figure 3. The closer the gap between bacon and feed prices the higher the pig meat to feed price ratio and consequently profitability. When viewing Figure 3 in conjunction with Figure 2 we can see whether pig or feed price had the greatest influence on the ratio at any given time.

The cycle in net terms

The MOFC and price-ratio graphs show a cyclical pattern, with the peaks and troughs becoming more extreme and lasting longer. A peak can rapidly turn into a trough, and troughs usually occur midyear. The pattern reflects pork supply and demand influence on pig price and grain supply and demand on feed price. The variability in pig prices is affected by factors including:

  • the Australian dollar exchange rate
  • producer production decisions (e.g., increasing herd size and slaughter numbers after a period of high profitability from late 1999 to early 2002; decreasing sow numbers in 2008 in response to low profitability)
  • seasonal conditions (summer infertility syndrome can reduce numbers for slaughter in the next spring and early summer)
  • processor behaviour to domestic pig prices and their imported pig meat purchase levels, and domestic and overseas consumer demand.

Factors influencing feed prices include drought (e.g., reducing supply, with cereal grains comprising around 80% of pig diets) and interaction with world markets.

From July 1999 margins climbed rapidly as a result of an expanding export market and the shortage of pigs for the domestic market. It reached a record high in December 1999 and remained well above the long-term average for the longest period (26 months) since data was first collated in 1976. From mid-2002, profitability was mostly below average, with a large influence from drought, until lower pig supply in late 2008 and early 2009 increased pig prices.

The downturns in profitability such as in 1998, 2002 and 2007 have resulted in producers leaving the pig industry. The changes in profitability have influenced the structure of the industry, with an increasing individual herd size and fewer producers, with the state herd size remaining fairly steady. There has also been an increase in integration with other sectors such as with abattoirs and pig meat processors, and an increase in product branding/niche marketing.

Future fluctuations in returns and the intervals between them may not follow the same pattern as past cycles. In practice, there have been improvements in productivity, such as in feed conversion i.e. the total feed required for each kg of meat produced. In summary the picture is one of wide cyclical fluctuations above and below a stable long-term profit level.

Pig meat and feed prices for budgeting

Be careful when using current prices in budgets as prices may be misleadingly high or low, depending on where the pig industry is in the cycle. When preparing a budget 12 months ahead, estimate next year's prices using your knowledge of the cycle and current industry trends.

When budgeting for the long term, such as when deciding whether or not to invest in pig production or expansion, look up to 10 years ahead. Accurately estimating future prices is difficult, but using the average price over the past five to 10 years can be used as a guide. Remember to take inflation into account 'real' prices, which can be calculated from actual prices by using the CPI.

Price information source

Pig meat price is based on a South East Queensland buyer's average baconer prices, less an allowance for grading. Feed price is a commercial stockfeed manufacturer's bulk price delivered to Toowoomba district for pig grower/finisher feeds. The prices quoted by other pig meat processors and feed sources may vary.