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Will luck hold for hog producers?

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[JUNE 2, 2004]  URBANA -- Every once in a while something good happens to hog producers. Facing a potential feed cost crisis in the early spring, financial relief came in the form of sharply lower feed prices and surging cash hog prices since early April. Now the question: Will this good fortune continue?

"Pork production is up more than 4 percent in 2004, yet hog prices are up 28 percent. At an average of $47.50 so far for the year, the average price is more than $10 per live hundredweight above the average for the January through May period of 2003," said Purdue University Extension economist Chris Hurt.

Hurt says there are three reasons why hog prices have held up.

"First, pork exports have been remarkable. In the first quarter of the year, pork exports rose by 27 percent as some world buyers heavily substituted pork for restricted beef and broiler imports. Mexico increased pork purchases by 88 percent in the first quarter as beef purchases from the U.S. dropped by 86 percent. Canadian purchases of pork increased by 31 percent as beef purchases dropped by 95 percent. The Japanese, on the other hand, purchased only 7 percent more pork. Pork export prospects continue to be strong, as restrictions on beef exports are now expected to remain in place for much of the year," said Hurt.

The second factor driving much higher hog prices is the robust U.S. economy and diet trends.

"Disposable personal income rose by 6 percent in the first quarter of the year. Real GDP growth was a healthy 4.4 percent. Strong consumer demand, driven by purchasing power and high-protein diets, has resulted in wholesale pork prices being sharply higher in the first five months of the year. Pork belly prices were up 18 percent higher, loin prices were up 22 percent higher, and ham prices were 28 percent higher than in the same period in 2003. Forecasts for the U.S. economy remain optimistic, with a 4.5 percent expected real growth in GDP this year and around 4 percent for 2005," said Hurt.

Third, producers have been getting a larger share of retail pork expenditures.

 

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"So far this year, producers have received 29 percent of the retail dollar spent on pork, compared to only 24 percent last year during the same period. Marketing margins have narrowed for both packers and retailers," explained Hurt.

He expects these positive factors to remain in place for the remainder of the year.

"World and U.S. economic growth appears to remain favorable, and producers' share of the retail pork dollar should remain strong," he said.

The only negative is on the supply side.

"Pork production will be at a record 20.6 billion pounds, a 3 percent increase from production of a year ago. However, extraordinary demand has won the battle so far, and pork supplies should begin to moderate in September and move lower than year-earlier levels in the winter," said Hurt.

Hurt expects prices for 51-52 percent lean carcasses on a live-weight basis to average in the very high $40s this summer before moving to the low $40s this fall. Winter prices are expected to be in the mid-$40s. Lean hog futures prices are well ahead of these forecasts for this summer and appear to offer excellent hedging opportunities.

"Everyone knows that feed prices will be volatile for the next couple of months. After a tremendous start to the planting season, the remainder of the soybean crop will be late-seeded, and excess moisture may have reduced the yield advantages of the early start for corn," said Hurt.

He says that at current futures prices, hog producers could lock in profits for lean hogs, corn and soybean meal. He expects prices to drop to closer to break-even prices for the fall and winter.

[University of Illinois news release]

 

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