Purdue News
Purdue News
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April 23, 2004 Economist: Market trends put hog producers over a pork barrelWEST LAFAYETTE, Ind. - Pork producers could take it on the chops - again. Record production, coupled with high feed costs, threaten to slap hog farmers with financial losses the last half of 2004. Those producers able to ride out the tough times might see better days next year and in 2006, said Chris Hurt, Purdue University agricultural economist. Pork production in the United States is on pace to approach 20.4 billion pounds this year, Hurt said. Prices farmers receive for their hogs have been higher than usual, as well, he said. But those favorable market prices are being overshadowed by rising feed costs, brought on by steep increases in grain prices. "For pork producers, it is a scary time because of the uncertainty of feed prices," Hurt said. "We're very close to the edge in terms of corn supplies, and corn is a primary ingredient in feed rations. We've seen production costs pushed up to near $50 per live hundredweight. Hog producers don't have much ability to pay a lot more for corn than $3 a bushel." Farmers also feed hogs soybean meal. Tight soybean stocks drove cash prices above $10 a bushel, resulting in soybean meal costs as high as $340 per metric ton - more than $100 higher than normal. About the best hog producers can hope to do this year is cover their costs, Hurt said. "The problem for the pork industry is that producers generally have to take their financial losses from higher feed prices before they receive compensation in the form of higher hog prices one or two years later," he said. While the price/cost disparity is tolerable for producers now, it will only deteriorate as the year wears on, Hurt said. "Hog prices have been better this year than what we had anticipated," he said. "Prices in the spring quarter are expected to average around $47 to $48 per live hundredweight. But the cost of production is going to be right in that neighborhood, so it looks like a break-even situation this spring. This summer, costs of production are going to continue to be quite high, in the high $40s and, perhaps, near $50 per hundredweight." A drop in hog prices is likely as summer gives way to fall, Hurt said. He projected average late-summer prices of around $45 a hundredweight - a loss to producers of $3 to $4 per hundredweight. "Then in the fall, hog prices could fall even more, dipping to the high $30s or perhaps around $40 a hundredweight," he said. "But we're still going to see high costs. The cost of production should be around $45 per hundredweight." By fall, producers could be losing $6 to $8 a hundredweight on their hogs. Should that occur, Hurt expects some producers to reduce the size of their breeding herds. Hurt's projections, if accurate, would be the latest in a long series of setbacks for pork producers. Four other times - in 1981, 1984, 1988 and 1996 - producers endured quarterly hog production costs around $50 per hundredweight or more, which is considered an unprofitable threshold. Three of those high-cost periods were caused by droughts that damaged crop production. The fourth, in 1996, was a combination of small crop size and strong grain demand. After a brief recovery in 1997, the hog industry suffered perhaps its greatest blow in 1998. Hog prices plummeted to below $10 a hundredweight, inflicting major economic losses. The past three years also have been disappointing for producers, Hurt said. "We've seen a fairly extended period with little profitability," he said. "If we go back the past three years, producers have been profitable in only two of the last 12 quarters." The last profitable quarter was July-September 2003, when producer revenues exceeded production costs by slightly more than $2 per hundredweight. Should poor weather cut the size of the 2004 corn and soybean crop, hog farmers could face even higher production costs, Hurt said. For that reason, Hurt advised hog producers to structure their marketing strategies with an eye to the future. The key is to survive the next 12 months so that they can reap the benefits when revenues are expected to once again move higher than production costs, he said. "By doing some hedging now, selling lean hog futures, covering the cost of corn and soybean meal, producers over the next 12 months can about break even," Hurt said. "Break-even, in our budgets, includes paying all the depreciation, all the interest and all of the wages. "That's not a bad scenario. A general philosophy to follow is: 'I have to get through the high price feed year, and then I'll be rewarded in the two years following the high feed price year.' That's a strategy producers should think about." Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu Source: Chris Hurt, (765) 494-4273, hurtc@purdue.edu Ag Communications: (765) 494-2722; Beth Forbes, bforbes@aes.purdue.edu Related Web site:
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