April 2003
Just like the college student who couldn’t pass the
chemistry test, the hog market has continued to fail one
“price test” after another so far this year.
The March Hogs and Pigs report provided renewed hope for
higher prices in the futures market, yet cash prices remained
stuck in the lower $30s one week after the release. Losses
continue to mount as the market must now rely on the traditional
spring price rally to salvage a return to a breakeven situation.
Needless to say, producers need to see the hog market pass
this test.
The March inventory report from USDA indicated that producers
across the country have reduced the size of their breeding
herds by 4.5 percent. Given the large financial losses over
the past year, even greater reductions in the herd can be
expected throughout 2003. Farrowing intentions for this
spring and summer are down at least 3 percent which should
reduce the number of market animals through next winter.
The direction is correct, but there remains a question of
whether the magnitude of the reduction is large enough to
push hog prices back into profitable ranges.
Minnesota was the only major production state to have an
increase in the size of its breeding herd which was up 4
percent. Oklahoma and Texas breeding herds remained unchanged.
Illinois and Iowa herds were down 7 percent, Indiana was
down 6 percent, Nebraska was down 4 percent and both Missouri
and Ohio were off 3 percent. Producer decisions to decrease
their herds may have been influenced in the Eastern Corn
Belt by the small corn crop (121 bushel average in Indiana
and only 88 bushels per acre in Ohio). However, the record
corn crop in the Western Corn Belt does not explain large
decreases in the Iowa herd with 165 bushels per acre corn
yields.
The market herd was reported to be down only 1.6 percent.
There is some hopeful news in the weight breakdowns as it
would appear that the number available for slaughter should
soon begin to drop. The 180 pound and over category was
more than 1 percent greater than last year at this time.
However, most of these hogs should have been marketed by
early April. Pigs that will come to market in April through
August were down from 2 percent to 2.5 percent. If so, this
could finally mean that slaughter supplies will soon be
coming down, and provided the needed stimulus for rising
prices.
Producers have been operating at a loss for the last 13
months dating back to March of 2002. Those losses were the
most severe in the last quarter of 2002 when they averaged
an estimated $21 per head for average costs producers. Losses
were more moderate in the first quarter of 2003, but still
were about $9 per head. Low hog prices helped packers to
their best margins in four years during this period.
Given the larger than expected supplies so far this year,
pork production for the entire year may only be down 1 percent,
however, that means about a 2 percent reduction for the
remainder of the year. With continued small beef supplies
and the potential for a recovering economy, hog prices are
expected to average $37 to $38 for the year. The highest
prices are still expected to come this spring when daily
highs could move into the lower-to-mid $40s, but late summer
prices are expected to drop back toward the higher $30s.
Prices in the mid $30s should be expected for late in the
year, with prices moving into the higher $30s for the first
quarter of 2004.
Moderation in costs of production should also be expected
over the next 12 months. Interest rates remain low, and
could even dip somewhat before increasing late in 2003.
Fuel and energy prices are likely to move lower with the
resolution of military conflict in Iraq and the increase
of oil supplies from that country into the world market.
Feed prices face the uncertainty of the coming growing season,
but a “normal” weather situation in the U.S.
could lower both corn and meal prices somewhat, although
dramatic reductions in corn prices should not be expected
at this time.
Continued financial discouragement needs to stimulate more
producers to reduce their herd sizes allowing for even larger
reductions in the national breeding herd later this year.
Unfortunately, it appears that the industry is slow to adjust
hog numbers downward at this time likely due to the concentrated
industry structure and the newness of capital investments
made over the last 10 years. In past hog cycles, it has
taken around one and one-half years from a period of losses
until the industry can reduce production and return to profits.
If the timing is similar on this cycle, this would mean
we are just entering the time when better prices would be
expected with the best of the prices and profits not anticipated
until 2004.
Chris Hurt
Purdue University
April 7, 2003
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