August 6, 2002
HOG PRODUCTION PROFITABLE IN 2001, RED INK ON THE WAY
For the third year in a row, total returns exceeded total costs
for hog producers in 2001. Good market hog prices, especially during
the second and third quarter, and continual low feed costs were
the main factors for the positive profit margins. However, increased
pork production, sluggish demand and increasing feed costs will
result in negative profit margins for producers in 2002.
Data for this report is summarized by University of Illinois agricultural
economists in cooperation with the Illinois Farm Business Farm Management
(FBFM) Association. Individual records tabulated were from farmers
enrolled in the FBFM record keeping and business analysis program.
Higher nonfeed costs resulted in Illinois hog producer profits
to decrease by $3.57 per hundredweight produced compared to 2000
(Table 1). Total returns in 2001 averaged $42.54 per hundredweight
produced. Total returns for the farrow-to-finish hog enterprises
exceeded total production costs by $2.56 per hundredweight produced
in 2001. Good market hog prices and continued low feed costs contributed
to the positive returns. The 2000 return was $6.13. For the five-year
period, 1997 through 2001, production costs exceeded returns by
91 cents per hundredweight. The negative returns were due to 1998,
when total costs exceeded returns by $15.44 per hundredweight. Three
of the past five years show a positive return for farrow-to-finish
COST OF PRODUCTION
The total cost of production in 2001 averaged $39.98 per hundredweight
of pork produced, compared with $36.52 in 2000 (Table 1). Feed costs
made up 51 percent of total costs, or $20.37 in 2001, as compared
to $19.96 in 2000. Feed costs have remained at relatively low levels
the last three years (Figure 1).
The nonfeed cost data reported in Table 1 have been divided into
two categories: "Operating costs" and "Other costs."
This classification of production costs is important when making
short-run management decisions concerning the level (volume) of
production, particularly during periods of low prices. Nonfeed costs
accounted for $19.61 in 2001, an increase of $3.05 from 2000. Nonfeed
costs included $7.68 per hundredweight of operating costs and $11.93
per hundredweight of other costs. Nonfeed costs were at their highest
level of any year since 1992. Labor costs increase from $3.73 per
hundredweight to $5.30.
The "Other costs" category includes depreciation, labor,
and an interest charge on all capital, although on most farms part
of the labor and the interest charge are cash costs. The proportion
of labor that is hired largely depends on the farm's size. A one-man
farm does not hire much labor, while a four-man farm may hire a
major share of the labor.
The share of the interest charge that is a cash expenditure depends
upon the owner's equity in the business. It could range from zero
to nearly 100 percent. On most farms, some share of the interest
charge will be paid in cash.
Hog prices are expected to average about $35.75 per hundredweight
in 2002. The size of the corn and soybean crop will have a significant
effect on feed costs. As of the beginning of August, much of the
crop is under significant stress due to dry, hot weather. Current
crop prospects would indicate that feed costs could increase significantly.
Feed costs are expected to average about $21.75 per hundredweight
and nonfeed costs $17.75 in 2002. Total costs of production would
be $39.50 per hundredweight, or about $3.75 per hundredweight above
the average price received. If these projections materialize, 2002
will be the first year since 1998 that total costs exceeded total
returns for hog producers.
Issued by: Dale Lattz,
Department of Agricultural and Consumer Economics