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Chris Hurt said the positive factors
now influencing hog prices, and leading some to believe the
enterprise may be a boon for farmers, cannot be expected to continue
into the extended future.
"Feed costs will not likely stay as low as today when crop yields
return to normal in the future," he said. "The current level of pork
exports will likely retreat when U.S. beef exports are restored.
Finally, marketing margins will likely return to more normal levels
in late 2005 and 2006.
"The one positive that remains is
that domestic pork demand does appear to be very good this year,
with retain prices up nearly 5 percent even with almost 3 percent
higher pork production."
Hurt's comments came as he reviewed
the current state of the U.S. pork industry.
"Rural communities throughout the
Midwest can long remember when hogs were regarded as the 'mortgage
lifters,'" he said. "A hog enterprise had the reputation of
generating positive cash flows and adding much-needed returns to
family living expenses plus a little extra to pay off land debt.
"That reputation was lost after the
early 1990s as technology and size of operations changed, leaving
mostly negative margins for family farms that could not meet the new
industry standards."
This year, margins are back in the
black and 2005 looks very good as well, Hurt noted. Profit margins
this year will reach an estimated $22 per head. In contrast, in the
years from 1992 to 2003, the average annual profit margin was less
than $4 per head. The margins this year have even small producers
thinking as follows: "At $22 per head and 20 pigs per sow per year,
one sow will generate $440 of profit, and 100 sows will generate
$44,000 profit per year."
However, Hurt noted, this bright
vision fades when the causes of the current profitability are
examined.
"Why are hog margins so good this
year and will they remain so into 2005?" he asked. "The answer is a
combination of three major events from outside the pork production
sector. The first is the enormous 2004 corn and soybean crops that
lowered feed prices. The transition from high feed prices in the
first half of 2004 to the low feed prices in the last half increased
profit margins by nearly $18 per hog.
"The second is the discovery of mad
cow disease in a cow in the United States on Dec. 23, 2003. Exports
of U.S. beef were initially cut off, and major buyers are still
staying away. So far this year, beef exports are down 85 percent
from the same period a year earlier. One of the beneficiaries of
limited beef exports has been pork producers, since pork exports
have risen by 24 percent. A record 10 percent of our pork production
is moving to export markets this year. This compares with barely 4
percent 10 years ago."
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The third factor, Hurt added, is the
way retailers are featuring pork this year.
"With record-high retail beef
prices, it appears that retailers are pushing pork as a more
moderate-priced substitute," he said. "This has resulted in retail
margins for beef being very high but margins for pork being very
low. The reduced marketing margins -- both retail and at the packer
level -- are enabling about $13 more per head to be returned to
producers compared to last year's margins."
So it appears unlikely that hog
production will return to the role of "mortgage lifter" for family
farms.
"The current period of very
favorable profits is primarily a result of three factors that
occurred this year but were outside the production industry," Hurt
said. "First, the industry was downsizing in the spring of 2004 due
to the anticipation of high feed prices, but in reality, low feed
prices resulted, with huge corn and soybean harvest. Second, mad cow
disease resulted in strong pork exports, and finally pork marketing
margins have been very narrow.
"There are positives, however. The
growth in U.S. pork demand seems to suggest that meat demand has
turned the corner in favor of animal-sourced proteins in general.
Secondly, while pork exports have been extra strong this year, the
overall trend remains positive."
A final reason precludes the return
of the "mortgage lifter" days, Hurt added.
"The structure of pork production is
totally different today," he said. "Most families that elect to
become part of the modern pork industry will do so as contract
operations for larger hog corporations. In this way, they may become
an important part of a highly technical and sophisticated production
system that is cost-efficient.
"While this may help lift the
mortgages on these specialized hog farms, the ownership, and
therefore the profits, is much more concentrated in many fewer hands
today. As an example, the October 2004 Successful Farming magazine
reports that the 30 largest U.S. hog production companies now
control 45 percent of all the nation's sows."
[University
of Illinois news release]
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