January 2004
What will the new year bring for the pork industry? How
will producers respond to higher feed prices? How will BSE
USA impact hog prices? Will producers finally get back to
profitability in 2004?
First, let’s look at the supply prospects for 2004.
The December Hogs and Pigs report indicated that the breeding
herd is down one percent, but the market supply is up two
percent. Producers intend to farrow two percent more sows
this winter, but cut back by one percent in the spring.
If so, this will result in production being nearly unchanged
from the 2003 record of 19.8 billion pounds. But with population
growth, this means that production per capita will drop
about one percent and be the foundation for a modest improvement
in prices.
The issue of BSE USA will also be an influence in 2004.
The exact outcome is uncertain, but “best estimates”
can be made at this time. On the domestic front, expect
to see retail beef prices drop by 10 to 12 percent. Lower
beef prices will tend to result in some reduction in pork
demand. However, these “cross effects” are relatively
small for today’s consumer, so we anticipate only
about a one percent reduction in pork demand from the lower
retail beef prices.
The second component of BSE USA is the loss of beef exports
and the question of how much additional pork foreign countries
will buy from the U.S. These estimates are much more difficult
since there is not a historical precedence to draw upon.
Japan, Mexico, and South Korea were the major buyers of
U.S. beef in 2002 accounting for a remarkable 2.0 billion
pounds of our total 2.4 billion pounds of beef exports.
How much of this will come back to the U.S. in the form
of additional pork exports? No one knows the answer, but
the Japanese have an import safeguard which triggers when
the volume of pork imports reaches a 19 percent increase
compared to the average of the last three years. This may
limit the increase in their pork imports to more like 20
percent. South Korea has a fairly low cost domestic pork
production industry which will likely limit their additional
purchases of U.S. pork. Mexico will likely buy more U.S.
pork, but they have not been as large of pork importer as
Japan. Assuming that our beef imports are restricted for
six months, these positive pork demand impacts might reach
one percent of U.S. producetion, although there remains
considerable uncertainty. In summary, the negative demand
impacts from lower U.S. beef prices may be roughly offset
by the positive impacts of the lost beef exports.
The issue of what happens with BSE Canada and the potential
opening of their beef export markets in 2004 is also important.
After their May 20th announcement, the flow of market hogs
to the U.S. increased and represented an additional supply
of about 1.5 percent of our slaughter. This depressed U.S.
prices by about $2 per live hundredweight. If Canadian beef
exports resume sometime in 2004, beef prices will rise in
Canada and fewer live market hogs will be sent to the U.S.
The much stronger Canadian dollar will also help trim incentives
for Canadians to send market hogs to the U.S. in 2004.
Hog prices are expected to rise by about $2 per live hundredweight
in 2004 to average around $41. Prices are expected to move
upward toward $40 by late winter and into the mid-$40s by
late spring. Summer prices are expected to be in the lower-to-mid
$40s, before dropping to the very-high $30s for an average
in the last quarter of the year.
Unfortunately, hog producers may also have higher costs
of production to deal with in 2004. Using current futures
prices, higher corn costs are expected to increase costs
by about $.20 per live hundredweight compared to 2003, and
higher soybean meal prices are expected to increase costs
an additional $1.20 per live hundredweight. Thus, overall
costs may rise by about $1.50 with hog prices rising about
$2 for the year. This would mean little improvement in the
overall profitability for 2004. In 2003 it was estimated
that producers lost about $1 per live hundredweight and
that this would be reduced to a loss of about $.50 in 2004.
Overall, this means about a breakeven year.
Some further reduction in the breeding herd will likely
be required to bring the industry back to profitability
and the reduction in farrowing intentions for the spring
2004 quarter suggests the industry is moving in that direction.
Producers must also watch feed ingredient costs. It is likely
that the required soybean rationing has not yet occurred
and that tight world stocks of corn could still mean upward
price movements. Many factors point to a period of much
tighter world stocks of grains and soybeans and a era of
much higher and more volatile prices than the 1998 to 2002
period. The hog industry may still have to adjust pork supplies
downward to meet the reality of this higher costs structure.
Chris Hurt
January 5, 2004
Purdue University
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