Purdue News

April 5, 2005

Step back in time for best hog futures prices, economist says

WEST LAFAYETTE, Ind. - Hog producers could realize better profits if they reverse their thinking on forward pricing, said Chris Hurt, a Purdue University agricultural economist.

The best time to price live hog futures is earlier than it once was, Hurt said.

"As we go back 10 years, or even as much as 25 years, historically the best pricing opportunities, on average, have tended to come in late April and the first half of May," he said. "We now tend to see the cash price of hogs - that is, the daily price of hogs - be the best fairly early in the summer. A number of years ago we used to talk about July or July-August. Now we're talking more May to June as the peak cash price of the year."

Historical data indicates that from 1997 to 2004, seasonal live hog prices averaged $47.12 in May and $47.93 in June. Average prices in July were just under $47, with August prices averaging below $45. Already this year, April and May futures are averaging between $50 and $59.

"As we look at current futures prices, we think that over about the next five months - especially April through August - that there are opportunities to lock in prices near $55 on a liveweight basis," Hurt said. "That is probably in the range of $40 a head of profitability for most of our producers. Those are extraordinary profits."

Hurt expects 2005 to be a good year for pork producers. Hog farmers also enjoyed profitability in 2004.

"It was a turnaround year for producers in 2004," Hurt said. "In 2004, hog prices averaged about $52.50 per hundredweight on a liveweight basis. So far, 2005 is shaping up to be another excellent profit year for hogs."

The shift in futures price highs from midsummer to early summer has been brought on by factors at both the market and farm levels, Hurt said.

"We're seeing a couple of things take place," he said. "One, that seasonal cash prices tend to be the highest at that May-June time of year and, with it, enthusiasm on the cash side gets transferred over into the trading pits on the futures.

"A second thing we're seeing at that time of year is that we still have a lot of corn producers who are also hog producers. The last thing they're probably thinking about doing in that first half of May is forward pricing hogs. They're actually out planting corn at that time."

The pork industry is riding a strong wave of demand. Exports of United States pork products are up, primarily because many foreign trading partners are refusing to accept U.S. beef shipments. Beef exports have suffered since the first case of mad cow disease was found in Washington state in December 2003.

"What the rest of the world has purchased, as a substitute, is pork," Hurt said. "In Mexico, for instance, exports went up nearly 60 percent last year. Japan bought 16 percent more, and Canada's purchases of pork were up sharply."

Greater domestic demand for pork and narrower marketing margins that have placed more retail dollars in producers' pockets also are giving hog farmers reasons to smile, Hurt said.

Long-term prospects for pork producers are bright, although producers might have to endure a couple of tougher years ahead, Hurt said.

"In the hog industry, we tend to see two very good profit years followed by two less-than-good years," he said. "Those would be anticipated in 2006 and 2007. Generally, the first year of those two lesser years is the worst.

"That said, I think we're going to be looking at some opportunities for expansion in the U.S. hog industry. With the increase in exports and growth in the U.S. market, there is probably a need to grow the pork industry about 1.5 percent each year. Most of the expansion in the last five years in North America has come in Canada. With the very strong decrease in the U.S. dollar value relative to the Canadian dollar, we think that will give Canadian producers less incentive to move pigs to the United States.

"I'm more optimistic on the pork industry in the United States over the next five years, especially compared to all the adjustments the industry has had to make in the last five years."

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, forbes@purdue.edu
Agriculture News Page


Related Web site:
Purdue Department of Agricultural Economics


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