April 2007
Maybe it's because hog producers have yet to witness the local ethanol plant using much of the corn they use to feed, but as a group, they have not gotten the message yet. And what is that message? Feed prices are much higher and the quickest way for hog prices to move higher is to cut production. Instead they continue to expand.
In the March inventory update from USDA, hog producers reported they have increased the breeding herd by one percent. This means pork production will continue to increase by about two percent in 2007, reaching the eighth consecutive year of record pork production.
The national breeding herd on March 1 was 56,000 animals higher than last year on the same date. Most of the increase occurred in the Eastern Corn Belt (ECB) where numbers are up 50,000 head. The increases by state in the ECB are: Illinois +20,000; Indiana +10,000; Michigan +10,000; and Ohio and Wisconsin each up 5,000 head. In the Western Corn Belt, Iowa's herd was down 20,000 head which was offset by a similar increase in Minnesota . Across the country, the market herd was up by a bit over one percent.
Farrowing intentions are down modestly for the spring quarter, but unchanged for the summer quarter, perhaps finally indicating some slow down in the expansion.
On the demand front, export growth is also expected to slow sharply this year, but still be up five percent. This rate of growth is sharply reduced from what was a 75 percent increase in exports in the three previous years 2004, 2005, and 2006. And, high retail beef prices will cause some domestic shoppers to turn to the pork case.
What does this mean for prices? On a liveweight basis, prices are expected to average near $50 in the second and third quarter this year then drop to averages near $46 for the last quarter of 2007 and the first quarter of 2008. This means an average of about $48 over the next 12 months. On the other hand, the lean hog futures market is more optimistic.
Using the settlement prices on April 5, 2007 and the historic basis for the Eastern Corn Belt , futures were suggesting an average price closer to $51 over the next 12 months. Part of the reason futures are more optimistic seems to lie in the euphoric reaction of the pork industry to the 90.5 million acre corn planting number. This probably caused some liquidation of short positions in lean hog futures.
The break in corn prices after the March 30 th Prospective Plantings report was welcomed by hog producers, giving them added hope that crop producers could provide enough corn for both fuel and feed in the 2007/08 marketing year. However, as of this writing one week after the report, anticipated costs of production are still expected to move upward from around $47 per live hundredweight currently to near $49 by late 2007 and early 2008.
In the week after the report, corn prices dropped sharply but also recovered substantially, and meal prices were little changed. Thus, after all the excitement of the March 30 report, estimated costs of hog production were down less than $.50 per live hundredweight over the next 12 months.
Using the $48 expected price for the next 12 months, pork producers are looking at about a breakeven situation with $2 of profits per hundredweight this spring and summer followed by $3 of loss for the last quarter of 2007 and first quarter of 2008. Lean hog futures are more optimistic, which means producers could establish about a $2 per hundredweight profit margin by hedging lean hog futures and feed prices. Most should probably consider taking some positive margins while offered. Lean hog futures tend to move higher seasonally in April and early May, so this is a time to be watching those markets closely.
Producers need to realize that national pork supplies will have to be reduced before the industry will recover back to profitability. So far, the cost increases have been absorbed by reductions in pork producers' bank accounts. Assuming costs are now about $7 per hundredweight higher, this will reduce pork producer returns by about $2.0 billion in 2007 alone.
There are a few signs of adjustment such as lighter weights and unchanged farrowing intentions, but producers need to make greater adjustments to the ethanol era. More downward adjustments in the breeding herd are needed in coming months.
April 9, 2007
Chris Hurt
Purdue University
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