July 2003
Pork producers can look forward to the next 18 months with some
optimism as costs are expected to drop, and hog prices remain
at least high enough to cover all expenses. This is great news
for many producers needing to improve their relationship with
their lenders after about 14 months of operating losses.
Leading the improvement will be both lower feed costs and higher
hog prices with pork production reductions as a result of breeding
herd cut-backs. Costs are expected to drop about $2 per live hundredweight
by this fall with lower corn and soybean meal prices, and pork
supplies will be down an estimated two to three percent for the
remainder of this year.
The breeding herd continues to decline as producers responded
to discouraging prices and lack of profits over the past 14 months.
The breeding herd on June 1 was estimated by USDA to be down to
5.9 million animals, a reduction of over four percent from the
same period last year. This is the fourth quarterly report indicating
that the breeding herd is declining. Further declines are expected
though all of 2003 and thus pork supplies will continue to decline
through much of 2004.
Most Midwestern states have reduced their breeding herds. The
decline was led by Missouri with 11 percent fewer animals in the
breeding herd, but closely followed by Iowa and Ohio with an eight
percent reduction. Illinois’ herd was down seven percent,
Indiana down six percent, and Nebraska was down five percent.
These six states accounted for a reduction of 225,000 animals
in the breeding herd, with the national total down 269,000.
Increases to the breeding herd were noted in Oklahoma which was
up nine percent, Texas was up five percent, South Dakota was up
four percent, and Minnesota added two percent more sows. Producers
indicated they will farrow two percent fewer sows this summer
and one percent fewer this fall.
Pork supplies should continue to moderate throughout 2003 and
into 2004. Summer pork production is expected to be down two percent
and fall production down by near three percent. Pork production
during the first-half of 2004 is expected to be down one to two
percent. Hog prices are also likely to be supported by an improving
U.S. and world economy over the coming year and by the decline
of the U.S. dollar relative to the Canadian dollar.
Summer prices for 51% to 52% lean animals on a live weight basis
are expected to average in the low to mid-$40s, before dropping
to the higher $30s for a fall quarter average. Prices are anticipated
to average near $40 for the winter and back into the low-to-mid
$40s for the spring of 2004.
While a period of large profits cannot be forecast from the current
level of herd liquidation, observations on past hog cycles suggests
that the ultimate reduction in the herd may be larger and that
prices and profits will be greater than is now in view. In cycles
observed back to 1980, profits reached at least $10 per live hundredweight
in the most profitable quarters. The current “best estimate”
of the high price period would be the spring and summer of 2004.
To achieve $10 or greater per live hundredweight margins would
require hog prices in the higher $40s and above. While June 04
futures are reflecting live prices several dollars lower than
this at this time, hog producers will likely see profitable hedging
opportunities over the next 14 months.
Those farrow-to-finish operations considering exit from the industry
should focus on completing farrowings in the summer of 2004, and
thus selling the last of the market hogs by the end of 2004.
Chris Hurt
Purdue University
July 7. 2003
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