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"The pork production industry has been profitable since the
spring of 2004," said Chris Hurt. "Producers, however, relate
their concerns about large market uncertainties and the high
cost of buildings as two important reasons for not expanding.
"In addition, uncertainty over rising corn prices with booming
ethanol use has left many producers extremely cautious."
Hurt's comments came as he reviewed hog prices, which he
noted have added a smile to the faces of many producers. And the
much improved price performance since May has caused the futures
market and its analysts to look for explanations and to increase
the forecasts of fall and winter prices.
"The year got off to a rugged start," said Hurt. "In the
first four months of 2006, live hog prices averaged $42.24 per
live hundredweight. That was more than $9 below the average in
the same period in the previous year and kept revenues just
above costs of production."
Hurt offered a number of explanations as to why prices were
so depressed.
"First, meat and poultry production were very high," he said.
"During the first quarter, beef production was up 6 percent,
pork was up nearly 4 percent, and poultry was up near 4 percent.
Secondly, avian influenza in Europe in the winter and spring
resulted in reduced broiler exports, with that production pushed
back into the domestic market.
"Finally, the pork market expected pork supplies would
continue to grow throughout the year with more breeding herd
expansion. What evolved was different from expectations. Broiler
exports picked up again late in the spring, the growth in pork
supplies early in the year yielded to more moderate increases in
the summer, and the USDA's June Hogs and Pigs report confirmed
little expansion of the U.S. breeding herd."
The pork industry, he noted, is less interested in history
and more in price forecasts for this fall and winter. Futures
markets have increased price expectations. October lean hog
futures traded around $56 in the spring, increased to near $60
in the summer and increased to about $66 in the past month. The
price increase from late May to the current time has been about
$8 for the October contract and $5 for the February 2007
contract.
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 "Fundamentally, pork supplies are now expected to be up only 1 to
2 percent for this fall and winter," Hurt said. "This summer's
farrowings are expected to be unchanged, and fall farrowings are up
only 1 percent. Higher corn prices after this fall's harvest may
keep marketing weights fairly close to unchanged as well.
"Foreign demand for pork has continued to enhance hog prices.
With data currently available, exports for the year have been up 15
percent. With more pork moving out of the country, the available
supplies in the domestic market have been up less than 1 percent
this year. Finally, indications are that retail margins have been
narrower than anticipated this summer, which has added to farm-level
prices as well."
For the months of June, July and August, hog prices averaged
$3.40 higher than during the same period in 2005. If this additional
margin were to continue, as now appears likely, hog prices would
average about $49 in the last quarter of 2006 and around $46 in the
first quarter of 2007. These prices would be consistent with current
prices of around $66 for October lean hog futures and $62 for
February futures.
On whether or not to hedge, Hurt said the answer was up to
individuals.
"However, these are clearly substantially better pricing
opportunities than had been anticipated," he said. "They will
provide a considerable profit margin for most producers. Finally,
forward-pricing of lean hog futures for the fall and winter is often
recommended to be completed by the end of August or early September,
when summer cash prices still tend to be high. These are compelling
reasons to forward-price now."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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