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Chris Hurt said the answer may be very
complex and "related to what seems to be a general tendency toward
overall lower hog prices since about 1997."
Hurt's comments came as he reviewed the
hog market in the context of other commodities.
"Agricultural commodity prices have
generally been very strong this year," he said. "Cattle prices are
at record highs. Corn, soybean and wheat prices are sharply higher
than their past five-year averages. Broilers’ prices are over 10
percent higher than last year's price, and egg prices are up over 25
percent.
"Even lamb prices are nearly $20 per
hundred higher than last year."
Since 1998, he noted, live hog prices
have averaged only $38.56, which is by far the lowest level for any
six-year period during the post-inflation period of the early 1970s.
In contrast, the six-year average prices for the years ending in
1985, 1990 and 1995 were $46.88, $48.25 and $45.43, respectively.
"The obvious reason is the
industrialization of the industry, which may have driven costs
down," he said. "In addition, this 'Wal-Marting' of the industry has
collapsed profits to the thinnest of margins, which means that only
those with large volumes can generate a reasonable annual family
income.
"But there are other worries as well.
The seeming inelasticity of supply is one. This simply means that
producers have become very hesitant to reduce production even in the
face of apparent large losses."
Hurt added that another concern is that
some production companies negotiated marketing contracts that
provided them with prices substantially higher than market averages
over these depressed years.
"NAFTA may be a culprit as well," he
said. "U.S. producers were slow to recognize that Canada would be a
major hog growth area, sending an additional 4 million hogs to the
United States per year since 1997. This left no room for U.S.
producers to gain domestic and export market growth.
"And now, the era of cheap feed prices
may have drawn to a close with tight world stocks of corn and wheat
and continuing uncertainty of how to get through this marketing year
with a limitation on U.S. soybean supplies."
Hurt said another possibility is that
hogs are just late getting to the bullish price parade. The year of
2003 has had its surprises, especially in the form of much larger
Canadian hog imports after the May 20 BSE cow discovery in Canada.
It now appears that the United States will import one-half million
more market hogs from Canada than had been expected.
[to top of second column in
this article]
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"There are positive signs that hogs may
eventually make it to the bullish price parade," he noted. "While
hog production is going to be up by about 1 percent in 2003, live
hog prices are going to also be up about 13 percent. Higher
production and higher prices is a positive sign that demand may
actually have improved.
"The primary demand enhancer is likely
the record high retail beef prices that have comparison shoppers
running to the pork section of the meat case. High retail beef
prices will continue in 2004 and 2005 and will be an enhancement to
pork demand and hog prices. Rising U.S. and world incomes should add
to pork demand for the coming year as well."
Canadian production has been surging to
the United States in the past five years, especially in the form of
segregated, early weaned pigs, which have increased by 4 million
head since 1997.
"The incentive to have sows in Canada
and ship pigs to the United States for finishing was enhanced by the
increasing value of the U.S. dollar in the 1997 to 2002 time
period," Hurt said. "However, the tide has turned in the past year
as the U.S. dollar has dropped about 19 percent relative to the
Canadian dollar.
"While this will not immediately divert
the flow of SEW pigs, since most are on long-term contracts, it
greatly reduces the incentive to sign new or to renew old contracts.
Finally, Canadian beef is slowly being allowed to come into the
United States, and these volumes should expand in 2004. This will
mean that Canadian consumers will consume more pork and export less
to the United States in 2004."
Overall, there are a number of
fundamentals, especially on the demand side, that may be building
the case for a bullish price run for hogs sometime next year. The
final major factor, however, is supply, and at this point there is
little indication that U.S. producers intend to cut back, even in
the face of losses occurring over 40 percent of the time during the
1998 to 2003 time period.
"At this point, it appears that pork
production could rise modestly again next year, setting new high
production records," said Hurt. "If so, only modest improvement in
hog prices can be expected, moving from a live price of about $39
this year to around $41 next year.
"Critical to
supply prospects will be the information provided in the USDA's
December hogs and pigs report, to be released on Dec. 30."
[University of Illinois news release]
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