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"There are enough uncertainties
surrounding this expansion phase of the hog production cycle to
restrain producers from an all-out expansion," said Chris Hurt.
"There seem to be two questions on the
minds of hog producers these days. The first is: How long will these
profitable prices last? The second follows from the first: Should I
expand?"
Hurt said profitable prices will most
likely be with the industry through the summer of 2005, or for
another full year. The reasons include these: Feed prices will be
low, hog production will be moderate as breeding herd size has been
reduced, and demand will stay strong.
Last April, most hog producers started
budgeting 2004 corn crop prices above $3 per bushel; now they are
hoping to see prices below $2 per bushel. October soybean meal
futures peaked at $257 per ton but now are closer to $175 per ton.
"As a result of the bleak outlook last
spring, sow slaughter was up 8 percent in the first quarter and up 3
percent in the second quarter," Hurt said. "During the height of
feed cost concerns -- February, March and April -- sow slaughter was
up 12 percent from the same period a year earlier. As a result, the
U.S. breeding herd has been reduced, resulting in declining
farrowings, which started last spring and are expected to continue
through the summer.
"This means pork supplies will be close
to previous year levels through next summer."
With moderate supplies, Hurt added,
demand will continue to be the focus in hog price forecasts.
"Those forces are generally positive as
well and include strong export demand, high U.S. retail beef prices
causing consumers to turn toward pork and narrow pork marketing
margins, which enable producers to receive a much higher portion of
consumers' expenditures on pork," he said.
In the spring, the fear was of
production costs of $50 per live hundredweight with a market price
of $40.
"Those fears were quieted as the
outlook reversed over the summer," Hurt noted. "For the coming 12
months, forecasts are that costs will average near $40, with average
live hog prices in the higher $40s," he said.
"Producers responded to this outlook
reversal as well. Since early spring, sow slaughter dropped back to
unchanged in the May-through-August time period. The question now
is: When will expansion begin?"
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Some expansion can likely be expected
this fall with the harvest of new-crop corn, he said. The increase
in the number of gilts this fall will result in farrowings beginning
to increase in the second quarter of 2005, with larger pork supplies
by the fall of 2005.
"By historical standards, however, this
expansion may be tiny and result in the breeding herd registering
increases of only 2 to 4 percent," said Hurt. "The last big
expansion of the breeding herd was in 1998, when breeding herd
numbers reached nearly 10 percent above previous year levels.
Everyone familiar with the industry recalls the disastrous results
in late 1998 and 1999."
While the hog production and price
cycle remains, the magnitude of production variation across the
cycle is much smaller, but the magnitude of price and profit swings
remain nearly as large as in the past. Prices appear to be extremely
reactionary to small changes in supplies.
"While moderately lower supplies for
the remainder of 2004 and the first half of 2005 mean positive
prices and returns, this brings into question how low hog prices
could go with even small increases of pork production in the fall of
2005 and in 2006," Hurt said. "In addition, with corn utilization
growing dramatically and 2005 yields not likely to achieve the lofty
levels of this year, higher corn prices seem to be in the mix for
the 2005 corn crop as well.
"If one continues to believe in the
four-year hog cycle, then 2004 and 2005 are the profitable years and
2006 and 2007 will be the difficult years, with 2006 targeted as the
year with the potential for the largest losses."
Many questions remain. Has the
expansion in Canada run its course or will Canada continue to be the
primary source of pork production growth in North America? Here it
can be argued that the declining value of the U.S. dollar has taken
away much of the incentive for expansion there.
"Secondly, has the excess expansion
that occurred as the U.S. industry made the transition to an
industrialized industry run its course?" Hurt asked. "If so, margins
in general could be more positive in the next five years compared to
the last five.
"Finally,
when will beef and poultry trade restrictions be resolved and
discharge their bearish impact on hog prices?"
[University
of Illinois news release]
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