Inflationary pressures squeeze hog industry planning

Going ahead with a new barn project when construction prices have increased 30 percent, 50 percent or more can be impossible to justify.
 | File photo

Hog prices are sky-high. Demand is booming, likely for years to come, and producers are raking in profits.

So why aren’t farmers building new barns, or even doing the maintenance they need?

“A lot of people are having sticker shock,” said Neil Dirks, executive director of the United States National Pork Producers Council, about escalating construction costs.

“I do not see a large push towards expansion.”

Lumber prices have tripled. Steel prices are soaring. Copper is becoming a precious metal.

Anything used to build something suddenly seems much more expensive, making anyone thinking of investing in future capacity having to rework their business plans. With hog production relying on multimillion-dollar barn complexes, unexpectedly increased costs can stop something happening.

This is just one facet of the complex gem that’s capturing the eyes of most economy-watchers these days: inflation.

For months, market prognosticators have been arguing about whether inflation will break out as the pandemic winds down in the developed world.

Some think a big burst of inflation will occur as pent-up demand is unleashed as pandemic restrictions are lifted and people can travel, dine out and enjoy public entertainment again.

Most analysts expect to see that. It’s what happens afterward that is much more important.

Some think the short-term burst of inflation will lead into a long cycle of increasing inflation as the oceans of new money poured into the world’s economies by governments and central banks wash into goods and services sectors that have only limited capacities. With more money fighting for the same limited supply of stuff, prices will rise, they think.

Others think the nearby surge in inflation, which is already occurring, will only smoulder briefly before being doused by a wave of bankruptcies, consumer debt and long-term elevated unemployment that follows the ending of extraordinary government and central bank spending. Once society has to start paying back all the money, demand will be sucked out of the economy and inflation will fall back to very low levels.

For farmers, the impact of increasing inflation is often seen as a positive. Usually commodity prices increase before overall inflation begins rising, and those rising commodity prices are often the underlying cause of that inflation. The overall inflation rate, which costs most farmers marginal amounts more for the goods and services they consume, is more than compensated for by the much higher prices they receive for the basic commodities they produce.

When canola prices double and triple, moderate increases in the cost of clothes, cars and movie tickets don’t seem as big a deal as they do to urbanites on set incomes.

But higher prices also affect things farmers rely upon. Rising energy prices lead to higher fertilizer, grain transportation and farm machinery costs.

Higher labour costs boost the cost of almost everything. In labour-heavy sectors like livestock slaughter, those labour costs can significantly reduce prices and squeeze margins.

Grain farmers are usually able to wait out temporary surges in inflation. Some farmers get caught with fertilizer prices unbooked, and some are forced to buy big ticket items without the luxury of waiting out short-term price spikes, but grain farming (except for land) is much less capital intensive than hog production.

Cow-calf producers are in the same boat. Their need for super-expensive equipment and facilities is less intense than it is for hog producers.

Hog farmers, though, are in a pickle. For many, who own little land, almost everything relies upon barn systems that cost millions of dollars. Going ahead with a new barn project when construction prices have increased 30 percent, 50 percent or more can be impossible to justify.

Grain farmers can hold off from buying a quarter-section of land if they’re looking at a profitability squeeze. That’s a marginal crimp on their long-term plans.

But not going ahead with a new, bigger, more efficient barn system is much more significant to a hog producer. That’s the whole farm’s future being put on hold.

But it can be the right decision when inflation rears its ugly head.

That’s what the North American hog industry appears to be doing. Profits are good. Prices are incredible, even if feed prices steal some of that away. But the cost of expanding is soaring and future profitability is unclear. So, for many hog producers, the answer is to slowly age out existing facilities before deciding whether to reinvest in the industry.

That will create its own inflation in hog prices, as stagnant production meets presumably increasing demand. That will add to overall inflation and further compound the inflation trap.

It’s a bigger deal for hog producers than most other farmers, but it could be a harbinger, a canary in the coal mine, of the pressures that all farmers might be grappling with for years to come.

As it goes for hog farmers, it might go for you. It’s worth watching.

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