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"The report demonstrates the
unwillingness of pork producers to increase the sizes of their
herds," said Chris Hurt, Purdue University Extension economist.
"Since 2000, annual farrowings have been nearly steady at 11.4
[million] or 11.5 million sows."
The current numbers reported by the
USDA were a surprise to the market, which felt that very good
profits since the spring of 2004 would cause breeding herd
expansion.
"There are several reasons why
expansion has not occurred. First is that some producers likely used
the much-improved hog prices in 2004 as an opportunity to finally
leave the industry," said Hurt.
He says breeding herd numbers were
down by 3 percent in Indiana, Ohio, North Dakota, and South Dakota
and by 4 percent in Nebraska. They were also lower in Georgia by 12
percent, in Kentucky by 11 percent and in Tennessee by 8 percent.
These declines were largely offset by higher breeding herd numbers
in Iowa and Illinois, which increased by 1 and 2 percent
respectively. North Carolina, Minnesota and Missouri remained
unchanged.
"These numbers signal a shift in
production from the states with declining numbers to those with
increasing numbers," he said.
A second reason that expansion is
not yet showing up is that it remains very early in the profit cycle
for expansion.
"The increase in profit did not
occur until the second quarter of 2004, so this would mean the
spring of 2005 before farrowings would begin to increase. In
addition, some of the strength in 2004 hog prices was related to
improved pork exports that were positively affected by restricted
U.S. beef exports. Producers are aware that a return of beef exports
this year could have a negative impact on hog prices," said Hurt.
A third reason why U.S. producers
have been hesitant to expand is the rapid breeding herd expansion in
Canada over the past five years.
"The breeding herd expansion in
Canada since the start of the decade is equivalent to about a 6
percent expansion of the U.S. breeding herd," said Hurt.
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So what does this mean for pork
prices?
"On the supply side, limited
expansion means that pork supplies will only be about 1 percent
higher in 2005," said Hurt. "At the same time, demand is expected to
be very good in 2005, but not as strong as last year. And pork
exports may not be as favorable, since beef exports are expected to
resume at some point."
Also, in 2004 high-protein diets
received a great deal of media attention, helping increase demand.
And Hurt says this may not be repeated to the same extent in 2005.
Even with some demand leveling off
in 2005, profitability looks positive for pork producers.
"Prices for 51- to 52-percent lean
hogs on a liveweight basis are expected to average in the low $50s
for the year. Prices in the first quarter are expected to be in the
very high $40s on average, followed by prices moving into the
mid-$50s for potential yearly high prices in May and June. Summer
prices are expected to average in the very low $50s with the final
quarter of 2005 still holding price averages near $50," said Hurt.
"With cost of production figures in
the high $30s for the average producer, my current estimates are for
profits of nearly $13 per live hundredweight above all costs, which
will exceed the nearly $10 of profit in 2004. This could be the most
profitable hog year since 1990," he said.
The last statement brings up the
issue of whether producers can resist expansion in the face of this
robust profit outlook.
"Probably not. My guess is that it
is reasonable to expect more pork to begin showing up by late in the
summer, with prices in the final quarter lower than those currently
stated. But even with that possibility, 2005 may still feel like
'hog heaven,'" said Hurt.
[University of Illinois news release] |
