Purdue News

January 29, 1999 Hog prices give producers a case of market whiplash WEST LAFAYETTE, Ind. -- Hog prices have reached $30, compared to $8 in December, and that may be the first indication of a recovery, but it will take producers a long time to get out of the hole, says Purdue University livestock market analyst Chris Hurt. Since December, the key price-influencing event was the U.S. Department of Agriculture's reduction in slaughter expectations, said Hurt, an agricultural economist in the Purdue Cooperative Extension Service. "In the week before Christmas, the industry processed a record 2,243,000 head of hogs. By the third week of January, the number was 2,015,000, over 10 percent lower." In the first three weeks of January, weekly slaughter was up just 4 percent to 6 percent -- consistent with the USDA's prediction of a 4 percent gain over last January's numbers. Adding to December's supply glut was a backlog of hogs, Hurt said. As hogs stayed on farms longer than producers had intended, they got heavier. Weights rose from a weekly average of 258 pounds in late November to 262 pounds by mid-December. Recently, they returned to 258. "Just as important has been the remarkable recovery in wholesale values of pork," Hurt said. "Before Christmas, wholesale pork bellies were 35 cents per pound. By the third week of January, belly prices had risen by 46 percent." The wholesale increase comes after a drop in retail pork prices starting in mid-December and a resulting increase in consumer sales, as well as media coverage of pork producers' plight, Hurt said. Also, adverse January weather disrupted hog shipments to packers. "With stores featuring bargain pork prices and packers unable to supply the same volume of hogs, some shortages of featured cuts, such as pork loins, actually developed in January," Hurt said. He cited narrowing profit margins for retailers and packers as another price-recovery factor. "Retailers failed to send price signals to consumers that pork was in large supply relative to demand," Hurt said. "They kept retail prices almost constant when wholesale prices dropped sharply. This changed in late December and January." Packer profit margins also were up in November and December. "Profits were huge for packers," Hurt said. He added that processors usually pay producers only enough to keep raw product coming in. At times in December, packers could have bid $4 per hundredweight. Hurt said the question now is how much the improved supply situation is due to the weather-related delay in hogs coming to market. "I believe retailers have gotten the message to keep pork margins in line in '99 or risk deeper investigations of pricing policies," Hurt said. "Packers also must tread lightly on increasing margins. And, of course, producers must better report factual numbers of hogs to USDA so the industry will have more accurate information to match processing capacity with the number of market hogs. Finally, we must integrate the hog supply and processing data for Canada and the United States." Hurt said that if the USDA market numbers hold as reported, hog prices will be in the higher $20s per hundredweight in February, low $30s in March, and reach the mid-$30s by April. Production costs average about $36 per hundredweight. Summer prices should be in the high $30s to $40, with fall prices moving to the lower $40s. Still, Hurt estimated it may take until the end of 2000 before pork producers recover the equity loss they will accumulate from the fall of '98 through this spring. He also expects the loss of $300 million in Indiana pork receipts to cut through rural economies like a snow plow. "If you use a common multiplier of 3 to estimate the economic loss of pork revenue, the low prices ultimately will cost the Indiana economy $1 billion," he said. Source: Chris Hurt, (765) 494-4273; e-mail, hurt@agecon.purdue.edu Writer: Amy H. Raley, (765) 494-6682; e-mail, ahr@aes.purdue.edu Purdue News Service: (765) 494-2096; e-mail, purduenews@purdue.edu To the Purdue News and Photos Page