July 8, 2002
GET READY FOR NEXT BLAST
prices during the first-half of 2002, the pork industry may still
not have seen the worst, as losses are expected to mount this
fall and winter. During the last-half of 2002 and the first half
of 2003, pork supplies are expected to be nearly 3 percent larger
than during the same period a year earlier. Large supplies will
keep hog prices depressed, while rising feed prices will increase
costs. The period of losses is expected to span from this fall
until the late spring of 2003.
The USDA's June inventory report indicated that the nation's breeding
herd was only slightly larger than one year ago, but the market
herd was up 2 percent. The largest numbers of market hogs were
at heavier weights. For example, the number of pigs which will
be ready for market in July were 4 percent greater, but those
that will be ready for market from August to November were only
1 percent greater. The recent large rate of increase in slaughter
numbers should taper off into August, but market weights are expected
to continue to rise about 1 percent over the next year.
herd seems to have grown in the past year in some traditional
family farm states, while shrinking in some more corporate oriented
states. The breeding herd was up a surprising 10 percent in Nebraska,
7 percent in Illinois, 6 percent in Ohio, and 1 percent in Iowa.
However, some Midwestern states had decreases, including: Indiana
down 6 percent, Missouri down 3 percent, and Minnesota down 2
percent. Two corporate oriented states reported fewer sow numbers.
Colorado, which has seen sow depopulations in recent reports,
was down 12 percent and Oklahoma producers took a break from expansion,
posting a 3 percent decrease in their breeding herd. Texas remained
in strong expansion, with an 11 percent breeding herd rise.
than expected number of hogs to come to market this year is a
result of a larger expansion in the breeding herd last year. Pork
producers responded to a period of strong profits spanning from
the spring of 2000 through the summer of 2001. During this period,
estimated profits averaged over $10 per live hundredweight, or
about $27 per head. Producers report a 2 percent increase in sow
farrowing intentions this summer and a 1 percent increase for
Live hog prices are expected to average in the higher $30s this
summer, with a plunge to the lower $30s as a fourth quarter average.
Lows could reach the higher $20s during some weeks, most likely
from mid-October through November. Prices are expected to average
in a range of $31 to $35 in the first quarter of 2003 and in the
mid-$30s during the second quarter.
these hog price projections and current futures prices for corn
and soybean meal, losses are expected to average about $20 per
head this fall, $17 per head in the winter, and $12 in the spring
quarter of 2003. Unfortunately, there is a possibility that losses
could be larger.
in corn and soybean meal prices this summer have already added
about $2 per live hundredweight to the costs of production, with
current estimates of about $39 per live hundredweight. Weather
over the next two months will largely determine whether feed prices
continue to move higher or abate. If the crop is severely damaged
by dry conditions this summer, hog production costs will be driven
sharply higher. With $3.00 per bushel corn futures and $240 per
ton soybean meal futures, cost of production would be pushed to
$44 per hundredweight. Under this situation, losses this fall
would be extreme, averaging an estimated $34 per head Losses of
this magnitude would cause some additional liquidation of the
breeding herd, further depressing hog prices from current projections.
Of course, weather could also be benevolent and provide yields
that approach normal.
are currently in the most vulnerable market circumstance they
have faced since 1998. Hog prices are likely to be below costs
of production for an extended period this fall, winter, and through
the spring of 2003. Feed prices are also vulnerable to wide fluctuations
as weather determines the size of U.S. crops in coming months.
should consider the possibility of sharply higher feed costs and
evaluate the use of call options for upside price protection.
There are no opportunities to lock in profitable hog returns at
the current time, so most will want to take a wait and see attitude
with regard to forward pricing hogs. Low hog prices for this fall
and winter have been well anticipated by the futures market, and
sometimes this means that prices will not be as low as anticipated.
Those who cannot withstand, or are unwilling to undertake, a 9
month period of losses should evaluate the alternative of starting
to liquidate or reduce their herd size now.
Issued by Chris