Lessons for Hog Industry Economists
Why are we analysts more mushy-mouthed than usual about
the hog price and profit forecast? Well, maybe the old adage about
laying all of the economists in the world end to end and never reaching
a conclusion contains a great deal of truth. Actually, there are several
reasons – none of which are probably good enough for those of you
seeking our hopefully wise council – but consider:
The world has changed. Sure, sure – blame the world around you when
you can’t get it right! Yes, it is somewhat flimsy, but it’s
nonetheless true. When new policies regarding biofuels and gasoline
oxygenate took effect in 2005, everything changed in the U.S. corn
market. A quantum increase in corn demand could not be matched by a
quantum increase in corn supply year after year. In fact, corn supply
has yet to catch up with corn demand at prices anywhere near the
pre-ethanol levels. And when corn prices changed, so did the cost
structures of every livestock species, setting off the adjustments that
are still underway. Economists and analysts had not dealt with a
permanent change in costs since the early 1970s. There were a few of us
in the business at that time, but I was in high school and my interests
were far more focused on FFA and girls, not necessarily in that order.
I did not learn much about either markets or girls in those days, it
•The world has changed again. Just when we were getting a bit of a
handle on the dramatic production cost increases and, thus, long run
supply decreases, along comes the economic crisis and the novel
H1N1influenza virus to screw things up on the demand side. It is true
that neither factor has damaged domestic pork demand badly, but the soft
economy has reduced demand for both chicken and beef and various export
difficulties have contributed to pork demand that is nearly 5% lower
than one year ago through October. The export situation is complicated
by last year’s pork exports being off the charts through July –
masking a supply-demand situation that would (or should) have resulted
in lower prices and much larger losses had it not been for extraordinary
Liquidation is a Slow Process
At the risk of sounding like a broken record – the U.S.
pork industry has sustained two years of losses totaling over $5
billion. Current economics show costs very close to $130 to $135/market
hog, with revenue lingering around $100-$105/head. It seems that we have
been averaging over $25/head losses forever. The industry continues to
downsize, but we still have plenty of supply in the pork chain that we
need to work through to get to a level of profitability. Most producers
do not have a lot of liquidity left to help manage through sustained
losses. The industry must get to a profitable level soon.
Who is liquidating and why aren’t sow slaughter numbers higher?
I get this question everyday from producers and others who are watching
our industry. Liquidation is occurring. Producers are downsizing or
getting out of the business, but as I’ve said many times, this will be
a slow process. We will need to average 60,000 to 70,000 sows per week
for an extended period of time – probably through March of 2010 – to
get sow numbers down to a level where pork supply is in line with
demand. The issue for many producers is to maximize value for their
business even if they are liquidating. Producers will not sell all of
their sows in a short period of time. If sows are confirmed pregnant or
close to farrowing, they will want to capture the value of the weaned
pigs. The decision to liquidate, whether by the producer or the lender,
is never quick or easy.
The issue of the Cuban embargo and agricultural trade to
Cuba is beginning to gain congressional attention. Indications are that
Congressmen Jerry Moran (R-KS), Collin Peterson (D-MN), chairman of the
House Agriculture Committee, Rosa DeLauro (D-CT), chairwoman of the
House Agriculture Appropriations subcommittee, and Jo Ann Emerson (R-MO)
will be advocating for legislation to expand agricultural trade to Cuba.
According to reports, the bill would: 1) eliminate the need to go
through banks in other countries to conduct agricultural trades; 2)
require agricultural exports to Cuba to meet the same payment
requirements as exports to other countries by requiring payment when the
title of the shipment changes hands; and 3) allow U.S. citizens to
travel to Cuba, reducing the bureaucratic red tape required for
agricultural association, agribusinesses, and others to make
agricultural sales. Former President Bill Clinton signed legislation in
2000 to allow some agricultural and medical shipments to Cuba. Total
exports have grown from $7 million in 2000 to $711.5 million in 2008.
Agricultural exports to Cuba in 2008 were: corn, 27%; meat, poultry and
fish, 21.5%; wheat, 19%; soybeans, 9.4%; animal feed, 8.4%; and other
agricultural goods, 11.2%. Agriculture has been one of the strongest
proponents to end the Cuban embargo.
Locking in Futures Prices to Survive in 2010
Pork producers facing the prospects of a third year in a
row of losses might want to consider locking in prices for 2010 given
current hog futures prices, according to Purdue University Extension
Economist Chris Hurt.
Hurt predicts hog prices will average about $46 to $47 per
hundredweight next year, starting at $44 in the first quarter, moving to
near $50 in the second and third quarters and back to the mid-$40s in
the final quarter.
“Given the assumption of $50 costs, this would still leave $10 of
loss per head, the third year in a row of losses,” Hurt says. However,
the current financial realities could mean the herd will decline,
demand will improve and hog prices will track higher than the current
Dec. 1, 2009: Ventilation Systems
Workshop, Animal Sciences Building, The Ohio State University,
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Dec. 8, 2009: Pork Profit Seminars, Nevada, MO;
contact: Missouri Pork Association at (573) 445-8375.
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