 "That means aggressive liquidation, most likely based on
financial attrition," said Chris Hurt. "That is not a pretty
solution, but it is the market solution, and markets can be
brutal."As those producers go down one by one, many of them
may lament the crazy times they were caught up in as the
biofuels era and the unusual macroeconomic events changed
agricultural market relationships in 2008."
Hurt's comments came as he reviewed the precarious state of
the U.S. pork industry.
"Who is going to bail out the pork industry?" he said. "The
Federal Reserve Bank of the United States has recently been in
the news, helping to assure that a well-known investment bank
would remain liquid. The Congress of the United States is
considering potential assistance for homeowners caught up in
subprime mortgage problems.
"Farm-state politicians in the upper Great Plains hope to add
billions of dollars for disaster assistance in the next farm
bill, even before there is a disaster. Perhaps they need only to
look to the pork industry to see a financial disaster in
progress."
Pork industry losses may total $3.5 billion in 2008, a
devastating amount that represents about 25 percent of the total
value of production, Hurt added.
Hurt noted that there is plenty of blame to go around,
including producers who overexpanded production. The USDA
reports that the hog breeding herd on March 1 was unchanged from
the year-earlier level. Producers intend to farrow the same
number of sows in the spring quarter as one year ago and 2
percent fewer in the summer quarter.
Fall production can be expected to rise by about 1 percent,
followed by a decrease of 2 percent next winter.
Hog prices averaged only $39.50 on a live-weight basis in the
first quarter of the year. Given the 10 percent increase in
production, that price may be higher than would have been
expected.
"Prices are going to improve seasonally in coming weeks, but
they will remain disappointing for all of 2008," he said.
"Second-quarter prices are expected to average only $47, with
third-quarter prices at about $48, several dollars lower than
had been expected. Fourth-quarter prices may average near $45,
with winter prices moving up about $2.
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"For the entire year of 2008, prices may average about $45, which is
the lowest level since 2003."
Unfortunately, Hurt added, there has not been enough sow
liquidation yet. In the first quarter, sow slaughter was up about 8
percent from a year ago, but this was only enough to drop the size
of the breeding herd by less than 1 percent as of March 1.
"Producers do indicate further cuts in the herd this spring, but
that will just modestly reduce farrowings this summer," he said. "A
much more aggressive liquidation will be needed. The magnitude of
that liquidation can be debated, but likely needs to be on the order
of at least 6 to 8 percent.
"The sooner that gets under way, the better."
Feed costs are to blame as well. With hog prices averaging a mere
$5 this year, costs are expected to be near $57 per live
hundredweight. While soybean meal prices have dropped nearly $50 per
ton from their highs in early March, corn prices have risen more
than 30 cents per bushel and largely offset the advantage of lower
meal prices.
"Prospects for 2008 losses now are near $30 per head," said Hurt.
Futures markets have not provided any comfort for pork hedgers as
basis has been weak. In the first quarter, basis levels averaged
$7.65 per carcass hundredweight under the nearby futures. This
compares with $4 under for the first-quarter average during the last
five years.
"This means that producers who used futures to hedge their hog
production have received about $3.65 per carcass hundredweight less
this year than they might have expected from the historical record,"
he said.
Ultimately, there will be no bailout for hog producers, Hurt
said.
"Maybe their losses will not create a financial panic as was the
concern if Bear Stearns were to fail," he said. "Maybe they do not
represent enough votes in an election year as do those with mortgage
problems.
"In addition, the pork industry is no longer dominated by
millions of small, independent family farmers as it once was."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences]
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