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[NOV. 28, 2006]  URBANA -- Everyone recognizes that the high feed price event facing the hog industry is different from previous ones, said a Purdue University Extension marketing specialist.

"Yields for the 2006 crop were average, and high prices are being driven by potentially vast new demands for energy from crops," said Chris Hurt. "Short production years tend to have peak prices for that year and then return closer to 'normal' prices when the next crop replenishes supply.

"Now, no one can say just how high corn prices will go and especially what the new 'normal' price of corn will be in the coming years."

Hurt's comments came as he reviewed the impact of higher corn prices on pork prices.

Futures prices have already provided some signals as to how the pork industry and pork prices will respond to much higher feed prices. From mid-September through Nov. 24, December 2006 corn futures rose $1.28 per bushel and December 2006 soybean meal futures increased $32 per ton.

"How have lean hog futures responded?" he asked. "December 2006 lean hog futures were down about 50 cent per hundredweight, but June 2007 futures were up $7.27 and October 2007 futures have gained $9.40."

Hurt wondered why the nearby futures prices have dropped modestly while the more deferred futures have moved higher.

"Of course, the answer lies in the market's expectation that some modest sow liquidation could occur this fall and winter, adding a bit to pork production," he said. "However, both the current modest sow liquidation plus the cancellation of plans to expand mean that pork supplies may begin to decline, especially by the last quarter of 2007."

Additional clues come from how pork producers have adjusted to high feed prices in the past. There have been five previous periods when corn futures exceeded $3.50 per bushel. Those were in 1974, 1980, 1983, 1988 and 1996. In contrast to this year, each of those was associated with a weather-related short crop. Two of the years, 1974 and 1996, were also associated with periods of strong demand, as is evident this year.

"The higher corn prices led to pork producers' losses in the year surrounding the high corn prices, except in 1996," said Hurt. "Losses for the other four years averaged about $3.34 per live hundredweight during the year of high prices.

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"In 1996, however, high corn prices came at a time when hog prices were also high, and profits averaged about $4 per live hundredweight in the year surrounding the high corn prices."

Hurt added that another interesting observation is how quickly hog futures recover after the sharp rise in corn prices.

"For this analysis, consider the length of time from the peak corn prices until lean hog futures make their next high," he said. "On average, over the past five high corn price events, that has averaged about 20 months but has ranged from as short as 10 months to as much as 36 months."

A second observation is how much nearby lean hog futures prices increased from the month when corn futures prices peaked until lean hog futures finally made their high, about 20 months later on average. The answer was about $22 per hundredweight on average across the five events, but the figure ranged from about $15 to $26.

The uniqueness of the current high corn price event makes predicting how the pork industry will respond this time much more difficult, Hurt said.

"Using the historical averages from the previous five high corn price events suggests that the next high on hog futures could occur in about 20 months," he said. "From today, that would be the summer of 2008, which seems reasonable. If lean hog futures were to increase by the average of $22 from current nearby futures levels, that would put them up to $85. This compares with the $86.60 record high since hog futures began trading on a lean basis."

Hurt cautioned that before hog producers jump for joy, they must remember that the history lesson also says that a period of losses of at least a year tends to precede the movement up in hog prices.

"It is now easy to identify 2007 and perhaps the first half of 2008 as the period when producers are most vulnerable to losses," he said. "Unfortunately, that is a guideline based on history repeating itself.

"Given the uncertainties of this high corn price event, those guidelines could be on shaky ground."

[University of Illinois College of Agricultural, Consumer and Environmental Sciences news release]


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