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"Low prices do not seem to be related to increased supplies,
which are up only 0.4 percent this year," said Chris Hurt. "The
same can be said for the more recent period of October and
November, when supplies have only been up about 1 percent. Yet,
with such a modest change in supply, prices are dramatically
lower this fall. "In November 2004, hog prices averaged about
$56 on a live-weight basis for 51 percent to 52 percent lean
hogs. This November that average was below $45."
No wonder, Hurt observed, that pork producers are "more than
ready for consumers to finish off the Thanksgiving turkey and
start thinking about the Christmas ham."
Starting in May 2004, demand led hog prices higher. From that
point through this past summer, prices were generally higher
than would have been anticipated given the level of supply, Hurt
noted.
"This was attributed to extremely strong demand, led by
exports," he said. "Trade data lags several months, and at this
writing there is no sign of slack export demand. Through August,
this year's pork exports represented a record 13 percent of
production. When reduced imports are entered into the
calculation, net trade was improved the equivalent of adding
about 3 percent of annual production so far this year.
"This is in addition to over 2 percent added in 2004. Trade
has contributed more than 5 percent to aggregate demand in the
past two years."
On the domestic side, some have argued that pork demand has
weakened recently.
"One does not have to look any further than Katrina and Rita
to find a potential culprit," Hurt said. "Those events caused
immediate erosion in consumer confidence, increased unemployment
and resulted in a few months of surging inflation.
"However, the long-term impacts on the national economy
appear to be modest, as inflation is already cooling and the
nation's consumers seemingly are returning to what they do best,
and this is consume."
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Hurt added that it is hard to argue that domestic meat demand is
weak, when cattle and beef prices are currently much higher than a
year ago with larger supplies. Some of it may be related to the
anticipation that beef exports to Asia will be reinstated in coming
months. Since pork exports have led hog prices higher, it is logical
to be concerned that this strength could wane as U.S. beef is
reintroduced to Japan and Korea.
"The most likely source of depressed hog prices however, is that
retail prices have been slow to drop this fall as farmer prices
fell," he said. "Once retailers are convinced that wholesale prices
will continue to be lower, they will also lower their retail prices
and sell more pork just in time for a nice hog price rally headed
into the Christmas ham season.
"Hog prices are expected to improve in December to the $45-to-$47
range for the live-weight equivalent for 51 percent to 52 percent
lean carcasses. Further strength is expected in the winter, with
prices averaging near $47 in the first quarter, $48 in the second
quarter and $49 in the third quarter."
Lean-hog futures traders are also confident of cash hog price
recovery, he noted. Futures prices through next August provide
hedging opportunities that are currently higher than projected cash
prices. In addition, with corn and soybean meal prices now looking
weak, costs of production through next summer are expected to be
about $38 to $39 per live hundredweight. This means a hedging profit
potential of $10 to $12 per live hundredweight.
"These hedging profits should be strongly considered, given the
possible opening of beef trade to Asia," said Hurt. "In addition,
the Dec. 28 release of the hogs and pigs report by USDA is expected
to show winter farrowings up 2 percent and the beginning of a U.S.
breeding herd expansion of perhaps 1 to 2 percent.
"Any greater buildup in these numbers may make current hedging
returns glow with missed profit opportunities."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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