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Hog producers ask: How much longer?

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[August 25, 2009]  URBANA -- From late 2007 to date, hog producers have been losing equity, and they are asking how long before the hog market turns around and they can start building equity again.

The amount of drain on equity depends on individual enterprises and their financial positions.

"On average, in the seven quarters of losses starting in the fourth quarter of 2007, a 10,000-head-per-year operation would have estimated losses of $315,000," said Chris Hurt, a Purdue University economist.

"By comparison, in the 1998-99 disaster, a 10,000-head-per-year producer would have lost $213,000 in the seven quarters of loss beginning with the first quarter of 1998," he said.

Unfortunately, he said, current forecasts are for losses to continue for three additional quarters, through the first quarter of 2010, increasing accumulated losses to $396,000, so this downturn will be both longer and more severe than in 1998-99.

Hurt said producers have been slow to reduce the breeding herd this time around.

"In the past two years, the U.S. breeding herd has dropped by just 3 percent. In contrast, from mid-1998 to mid-2000, the breeding herd was down 10 percent," he said.

There are at least four potential reasons for the slower rate of liquidation.

"The first may be that this time the industry’s losses were primarily related to much higher feed prices. Perhaps producers were not convinced that feed prices would stay high after their acceleration in late 2007," Hurt said.

He said the second reason may have been a misreading of the pork export surge in the spring and early summer of 2008, primarily driven by China and a cheap dollar.

"That surge was the primary stimulus for live hog prices moving from $39 in March 2008, to $58 in May and to highs above $60 in August. Prices that high meant $5-per-bushel corn was not as big a threat as earlier thought, and unfortunately this delayed breeding herd liquidation. Looking back, that export surge was a one-time unique event, as exports have returned to much lower, but more normal levels," he said.

Third, industry structure may be a culprit in such a slow downward herd adjustment. The industry has never had to make such a large downward adjustment with such a concentrated set of producers.

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"Finally, while the current string of losses has been large, profits and net worth accumulation were large in the generally profitable period from 2000 until the current downturn began in the final quarter of 2007," Hurt said.

He said that by the third quarter of 2007, the average hog producer had overcome the losses of 1998-99 and accumulated $1.45 million of profits. For the farm continuously in production since 1998, the current losses, which may accumulate to near $400,000 on this downturn, may be coming from a high equity base.

This makes the point that all hog farms are probably not in financial trouble.

"Those most vulnerable to the current financial losses are those that have started production in the last three years, those that have had large expansions in the past few years, and those that diverted some of their hog earnings in 2000 to 2007 into assets such as stocks or residential housing that plunged in value as well," he said.

How much longer will the economic stress continue?

"I expect modest losses this fall with live hog prices averaging about $40 to $42 and all costs near $45. For the winter, hog prices are expected to be in the low to mid-$40s with costs near $46. Profits may return in the spring of 2010 with prices rising to the higher $40s and costs remaining in the $46-to-$47 range. For all of 2010, I expect a modest profit of $2 to $5 per head," Hurt said.

[Text from file received from the University of Illinois College of Agricultural, Consumer and Environmental Sciences]


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