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"This may finally set in motion a U.S. expansion," said Chris Hurt.
"However, even with expansion getting under way this fall and
winter, the additional market supplies are not expected to show up
until the fall of 2006. This means that next year should be
profitable for producers." Hurt's comments came as he reviewed the
hog market, where several factors have come up positive for the pork
industry and prices have responded in an upward manner. If these
forces remain positive, Hurt noted, higher prices can be expected in
the lean hog futures markets, especially into 2006.
"Maybe the biggest positive news for the industry came Aug. 12
with the USDA's August crop production report," said Hurt. "That
report suggested that the nation's corn crop would be above 10
billion bushels, providing sufficient stocks, with no need to ration
usage.
"Soybean production was viewed as barely sufficient to meet
upcoming usage, with only modestly higher prices than for last
year's crop. Final yields will still be important for meal prices.
The reduction in prices from mid-July highs to today is over 50
cents per bushel for corn and about $55 per ton for soybean meal."
Hurt said that the impact on anticipated costs of production is
$4 to $5 per live hundredweight lower. Costs now look to be around
$40 per live hundredweight, with prices over the next year averaging
in the $45 to $47 range.
"Pork supplies have remained moderate this summer as well," he
said. "After the USDA's June hogs and pigs report, which showed no
expansion, some felt more hogs would actually show up in the
slaughter mix after a year of very good profits. That has not been
the case, as June, July and August slaughter numbers have been up
only modestly and very close to the inventory numbers in the June
report."
Demand strength, after seemingly hitting a snag in midsummer, has
now rebounded. Exports remain strong and are up 24 percent so far
this year. Pork exports this year represent 13 percent of domestic
production.
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"Part of the continued strength in exports is related to U.S.
beef export restrictions," said Hurt. "At this time, there seems to
be no resolution in sight with the Japanese on BSE (mad cow disease)
testing, suggesting that pork's strong export pace will continue."
Expectations are for live prices to average about $44 in the
fourth quarter. Some improvement is expected in the winter quarter,
with an average around $47. Spring quarter prices may move back to
near $50, on average. Prices are expected to moderate $3 to $4 next
summer, based upon anticipation of greater expansion showing up in
the USDA's Sept. 30 hogs and pigs report.
Lean hog futures, said Hurt, appear to be reasonably priced for
the October, December and February contracts, providing reasonable
forward pricing opportunities at this time.
"However, contracts for April, May, June, July and August 2006
seem to be anticipating a larger buildup in hog supplies," said
Hurt. "To have those larger supplies next spring and summer, more
pigs will have to be born this fall and winter. At this point, the
indication is that farrowings will be only slightly larger."
Hurt said there are several marketing steps that follow from this
logic.
"The first is to forward price some hogs for the
September-through-February time period," he said. "The next is to
remain open, or buy put options, for hogs that will go to market
after next February. On the feed side, corn looks to be cheap this
harvest, especially in the western Corn Belt. This favors owning and
storing as much corn as possible at harvest.
"Upward movement in meal prices seems more likely than for corn
prices. However, if the South American crop returns to near normal,
meal prices may be lower after February. Therefore, consider booking
meal late this summer for delivery through February and then watch
the development of the South American crop this winter."
[News release from the
University of Illinois College
of Agricultural, Consumer and Environmental Sciences]
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