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Hog producers say no expansion yet

[JAN. 4, 2005]  URBANA -- Hog producers across the country say they have not expanded their breeding herds and they will keep farrowings at about a constant level in coming months. That's from the latest USDA report on hogs and pigs.

"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]

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