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"The bad news is that pork supplies
have been larger than anticipated and feed prices are causing
production costs to surge," said Chris Hurt. "The good news,
however, is that hog prices so far have been higher than
anticipated."
Hurt's comments came as he reviewed the
state of the pork industry. He noted that pork production has been 2
percent higher than anticipated so far this year, with the
difference attributed primarily to increased imports of live hogs
from Canada.
"In the first seven weeks of the year,
the number of barrows and gilts coming from Canada to the United
States for slaughter was more than double the number in the same
period last year," said Hurt. "Slaughter animals from Canada this
year have represented about 3 percent of the total U.S. slaughter,
compared to fewer than 2 percent for the same period last year.
"In addition, the number of young pigs
coming from Canada so far this year has risen by 43 percent and
represents an additional 6 percent of U.S. slaughter animals."
The second bad news component involves
costs of production. By the end of February, March corn futures had
increased over 50 cents per bushel and March soybean meal futures by
about $35 per ton since the start of the year. The combined effect
raised costs of production by about $4 per live hundredweight, to an
estimated $45 to $46.
On the good news side, Hurt noted that
so far this year hog prices have had an impressive start by
averaging near $42 on a live weight basis for 51-52 percent lean
carcasses. These prices are 20 percent higher than during the same
period last year. At the end of February, prices were about $45,
which is very close to estimated costs of production.
"The source of the higher prices
appears to be large pork exports driven by restrictions on both beef
and poultry exports during most of February," said Hurt. "The
uncertainty of whether pork exports will continue their frantic pace
is tied to agreements to reopen foreign markets to beef and poultry.
It appears that a Canada-Mexico agreement may soon be forthcoming,
with Japan and South Korea perhaps to follow later this spring or
summer.
"The avian influenza cases in the
United States seem to be under better control in recent weeks and
may soon allow reopening of many markets. If so, these will both be
negative factors for pork exports and pork prices."
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Hurt also looked at income prospects
for pork producers after two months of 2004.
"Unfortunately, hog prices are not
expected to cover costs of production this year," he said. "It now
appears that costs will exceed $46 this summer and drop to only $43
this fall. Hog prices, on the other hand, will likely reach the mid-
to higher $40s in the spring and early summer but fall back to near
$40 in the fall.
"For the entire year of 2004, current
projections are for hog prices to average near $43 but for costs to
average about $45.50, resulting in prospects for an average loss of
$2.50 per live hundredweight."
The U.S. pork industry needs to
downsize for two reasons, he added. First is the continued growth of
the Canadian herd, as they extract more of the North American share
(24 percent more sows in the last five years). Second is the higher
cost structure. In the past, high-cost years have resulted in a
downsizing of the herd and a return to profits in the year following
the high-cost year.
"As has been suggested for several
months, producers need to have a feed ingredient plan in place,"
said Hurt. "Old crop soybean supplies may not be rationed yet and
the price of meal could still be higher, at least this spring and
summer.
"The corn situation has now become one
of anticipated tight stocks, not only for the remainder of this
marketing year but continuing into 2004-05. Corn prices could also
be much higher for the 2004 crop if use continues to grow or if
weather disrupts a normal growing season in the United States."
Finally, Hurt added, the pace of pork
exports is not expected to remain as favorable into the summer and
fall. Some forward pricing of lean hogs with current recovering
futures seems to be a reasonable consideration.
"In summary, pork producers have much
to be concerned about, with the growing potential for even higher
feed prices, with growing imports from Canada and with the potential
to reduce pork exports with the opening of beef and poultry export
markets," he said.
"Pork
producers may want to use price risk management opportunities to
come as close to break-even as possible for 2004 and await the
prospects of a better 2005 once the U.S. herd is reduced. The
alternative is the rising potential for catastrophic financial
consequences if U.S. weather should be adverse for 2004 crops."
[University of Illinois news
release]
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