Profitability probable for pork producers this year
WEST LAFAYETTE, Ind. The last time pork producers could use the word "profit" when referring to their bottom lines was November 1997. But with pork supplies expected to drop 3 percent in 2000, Purdue University agricultural economist Chris Hurt says hog farmers will begin to utter the word again, and perhaps use it regularly, as early as this March.
For all of 2000, Hurt says, pork prices should average $41 per live hundredweight. "Winter prices are expected to average in the mid-$30s," he says. "If so, this means prices will rally from the $33-$35 range at the start of the year to the higher $30s by the end of the first quarter in March. Prices are expected to move higher seasonally into the spring, perhaps with some prices into the $42-$45 range by June. Summer prices are expected to average in the $40 to $45 range."
If spring farrowing intentions drop 5 percent as reported in the December 1999 Hogs and Pigs report from the U.S. Department of Agriculture, Hurt says the typical fall price dip should not occur. "This means fall prices could continue to trade in the low- to mid-$40s," he says. "If demand remains favorable, prices could even be at least $2 higher than those forecast, and will likely improve further into the first half of 2001."
The USDA report brought the news that the nation's breeding herd was down 7 percent from the previous year's mark, and that the market herd was down 4 percent. "The erosion of the market herd is just what is needed to reduce an already glutted market supply to levels that will allow hog prices to rise back above costs," Hurt says. "Farrowing intentions this winter are down 3 percent, and down 5 percent for the spring."
Sharp reductions in breeding herds in the Midwest continued unabated as small producers cut herds or dropped out of hog farming altogether.
"The drama of the exodus was particularly evident east of the Mississippi, with a decrease of 21 percent of the breeding herd in Illinois in the last year," Hurt says. Wisconsin's breeding herd fell by 24 percent, Indiana's by 18 percent, and Ohio's by 15 percent.
"These four states accounted for a decrease of 240,000 head," Hurt says. "At 18 pigs per sow per year, this means over 4.3 million fewer hogs in the Eastern Corn Belt for 2000."
The Western Corn Belt breeding herd also headed down. The decline in Iowa, Minnesota, Kansas and South Dakota was 220,000 sows, translating into nearly 4 million fewer market hogs.
"As a result, packer supplies will be much tighter, especially in the Eastern Corn Belt, with stronger bids for hogs and much tighter packer margins than experienced in the past two years. Some plant slowdowns, or even shutdowns, may result by the last half of 2000."
While Midwest hog supplies will tighten significantly, Hurt says the southwest and western fringes of the Corn Belt will see increases. "The largest breeding herd increases were in Oklahoma and Colorado, where each state increased by 30,000 sows, and in Utah where the breeding herd was up by 10,000 sows. These three states have 70,000 more sows or about 1.4 million more pigs for 2000, which will somewhat offset the huge decreases in the Midwest," he says. "Also, some of the additional pigs from these expansions will be moved back to the Midwest for finishing. This is particularly true of the Colorado growth."
As prices rise, costs are expected to remain low in 2000. Hurt predicted expenses in the range of $36 to $37 per live hundredweight, which would translate into profits of about $5 per live hundredweight.
"This compares with losses of about $2 in 1999 and a loss of $7 per hundredweight in 1998," Hurt says. "It's likely that the year 2001 will also be a favorable year in the range of $3 to $6.
"The most favorable prices of this cycle are expected in the mid-2000 to mid-2001 period. Producers will want to be at maximum production at this time. On the other hand, those who have been seeking a place to liquidate their herds should also consider this period, especially mid-2001."
Given this outlook, Hurt says that lean hog futures for this summer and fall should not be sold unless prices are $62 or higher. "These levels have been achieved for summer contracts, but not for those maturing in the fall. Also, in the past, futures have tended to underestimate the ultimate strength of hog prices in high-price periods. This means that the use of options should be considered as a way to establish minimum prices, while allowing upside price potential."
Hurt says higher feed prices may cut into 2000 profits somewhat, so he advises producers to consider locking in some of their feed needs this winter for the second half of 2000 and early 2001.
Source: Chris Hurt, (765) 494-4273, firstname.lastname@example.org
Writer: Amy H. Raley, (765) 494-6682, email@example.com
Purdue News Service: (765) 494-2096; firstname.lastname@example.org