August 30, 2004
HOG PRODUCERS: GET READY FOR EXPANSION!
There seem to be two questions on the minds
of hog producers these days. The first is,How long will these
profitable prices last? The second follows from the first;
Should I expand?
Profitable prices will most likely be with the industry through
the summer of 2005, or for another full year. The reasons
include, feed prices will be low, hog production will be moderate
as breeding herd size has been reduced and demand will stay
Last April, most hog producers started budgeting 2004 corn
crop prices above $3.00 per bushel, now they are hoping to
see prices below $2.00 per bushel. October soybean meal futures
peaked at $257 per ton, but now are closer to $175 per ton.
As a result of the bleak outlook last spring, sow slaughter
was up 8 percent in the first quarter and up 3 percent in
the second quarter. During the height of feed cost concerns
- February, March, and April - sow slaughter was up 12 percent
from the same period a year earlier. As a result, the U.S.
breeding herd has been reduced, resulting in declining farrowings
which stated last spring and are expected to continue through
this winter. This means pork supplies will be close to previous
year levels through next summer.
With moderate supplies, demand will continue to be the focus
in hog price forecasts. Those forces are generally positive
as well and include strong export demand, high U.S. retail
beef prices causing consumers to turn toward pork, and narrow
pork marketing margins which enable producers to receive a
much higher portion of consumers= expenditures on pork.
In the spring, the fear was $50 per live hundredweight costs
with $40 hogs. Those fears were quieted as the outlook reversed
over the summer. For the coming 12 months, forecasts are that
costs will average near $40, with average live hog prices
in the higher $40s. Producers responded to this outlook reversal
as well. Since early spring, sow slaughter dropped back to
unchanged in the May through August time period. The question
now is, When will expansion begin?
Some expansion can likely be expected this fall with the
harvest of new crop corn. The increase in the number of gilts
this fall will result in farrowings beginning to increase
in the second quarter of 2005 with larger pork supplies by
the fall of 2005. By historical standards, however, this expansion
may be tiny and result in the breeding herd registering increases
of only 2 to 4 percent. The last big expansion of the breeding
herd was in 1998 when breeding herd numbers reached nearly
ten percent above previous year levels. Everyone familiar
with the industry recalls the disastrous results in late 1998
While the hog production and price cycle remains, the magnitude
of production variation across the cycle is much smaller,
but the magnitude of price and profit swings remain nearly
as large as in the past. Prices appear to be extremely reactionary
to small changes in supplies. While moderately lower supplies
for the remainder of 2004 and the first half of 2005 mean
positive prices and returns, this brings into question how
low hog prices could go with even small increases of pork
production in the fall of 2005 and in 2006. In addition, with
corn utilization growing dramatically and 2005 yields not
likely to achieve the lofty levels of this year, higher corn
prices seem to be in the mix for the 2005 corn crop as well.
If one continues to believe in the four year hog cycle, then
2004 and 2005 are the profitable years and 2006 and 2007 will
be the difficult years, with 2006 targeted as the year with
the potential for the largest losses.
Many questions remain. Has the expansion in Canada run its
course? or will they continue to be the primary source of
pork production growth in North America? Here it can be argued
that the declining value of the U.S. dollar has taken away
much of the incentive for expansion there. Secondly, has the
excess expansion that occurred as the U.S. industry made the
transition to an industrialized industry run its course? If
so, margins in general could be more positive in the next
five years compared to the last five. Finally, when will beef
and poultry trade restrictions be resolved and discharge their
bearish impact on hog prices?
Without question, there should be enough uncertainties in
producers= minds to keep the coming expansion phase of the
hog cycle at very modest levels.
Issued by Chris Hurt