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"Feed prices are much higher, and the quickest way for hog
prices to move higher is to cut production," said Chris Hurt.
"Instead, hog producers continue to expand. Maybe it's because
they have yet to witness the local ethanol plant using much of
the corn they use to feed, but as a group they haven't gotten
the message yet." Hurt's comments came as he reviewed the
USDA's March inventory update, in which hog producers reported
they have increased the size of the breeding herd by 1 percent.
"This means pork production will continue to increase by
about 2 percent in 2007, establishing the eighth consecutive
year of record pork production," he said.
The national breeding herd on March 1 was 56,000 animals
larger than the herd of last year. Most of the increase occurred
in the eastern Corn Belt, where numbers are up 50,000 head. The
increases in those states are 20,000 for Illinois; Indiana,
10,000; Michigan, 10,000; and Ohio and Wisconsin, 5,000 each.
In the western Corn Belt, Iowa's herd was down 20,000 head,
which was offset by a similar increase in Minnesota.
"Across the country, the market herd was up by a bit over 1
percent," said Hurt. "Farrowing intentions are down modestly for
the spring quarter but unchanged for the summer quarter, perhaps
finally indicating some slowdown in the expansion."
On the demand front, Hurt noted that export growth is
expected to slow sharply this year but still be up 5 percent.
This rate of growth is sharply reduced from the 75 percent
increase in exports over the three previous years. High retail
beef prices will cause some domestic shoppers to turn to the
pork case.
"What does this mean for prices?" Hurt asked. "On a live
weight basis, prices are expected to average near $50 in the
second and third quarters this year and near $46 for the last
quarter of 2007 and the first quarter of 2008. This means an
average of about $48 over the next 12 months.
"The lean hog futures market is more optimistic about price
prospects. Using the settlement prices on April 5 and the
historic basis for the eastern Corn Belt, futures were
suggesting an average price closer to $51 over the next 12
months."
Hurt believes that part of the reason futures are more
optimistic seems to lie in the euphoric reaction of the pork
industry to the 90.5-million-acre corn planting intentions
number. This probably caused some liquidation of short positions
in lean hog futures.
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 "The break in corn prices after the USDA's March 30 Prospective
Plantings report was welcomed by hog producers, giving them added
hope that crop producers could provide enough corn for both fuel and
feed in the 2007-08 marketing year," said Hurt. "However, one week
after the report, costs of production are still expected to increase
from around $47 per live hundredweight to near $49 by late 2007 and
early 2008.
"In the week after the report, corn prices dropped sharply but
also recovered substantially, and meal prices were little changed.
After all the excitement of the March 30 report, estimated costs of
hog production are down less than 50 cents per live hundredweight
over the next 12 months."
Using the $48 expected price for the next 12 months, pork
producers are looking at about a break-even situation, with $2 of
profits per hundredweight this spring and summer followed by $3 of
loss for the last quarter of 2007 and first quarter of 2008, said
Hurt.
Lean hog futures are more optimistic, which means producers could
establish about a $2 per hundredweight profit margin by hedging lean
hog futures and feed prices.
"Most should probably consider establishing some positive margins
while offered," he said. "Lean hog futures tend to move higher
seasonally in April and early May, so this is a time to be watching
those markets closely."
Hurt said that producers also need to realize that national pork
supplies will have to be reduced before the industry will recover
back to profitability.
"So far, the cost increases have been absorbed by reductions in
pork producers' bank accounts," he said. "Assuming costs are now
about $7 per hundredweight higher, pork producer returns will be
reduced by about $2 billion in 2007 alone.
"There are a few signs of adjustment, such as lighter weights and
unchanged farrowing intentions, but producers need to make greater
adjustments to the ethanol era. Larger declines in the breeding herd
are needed in coming months."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences]
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