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"After three years of favorable returns, 2007 is expected to be
close to break-even, with concerns that even higher feed prices
could drive the industry into losses," said Chris Hurt. "Costs
in 2007 are expected to be about 18 percent higher than in the
previous two years, with corn costs up an estimated 63 percent
and soybean meal costs up a much more modest 4 percent. In
addition, large uncertainty surrounds feed costs in 2007 as the
corn and soybean sectors adjust to the rapid explosion in corn
demand for fuel ethanol."
Hurt noted that the pork industry has not adjusted much yet
to the new realities of corn and soybean meal prices.
"The breeding herd remains in a slow expansion and is about 1
percent larger than the herd of a year ago," he said. "Market
herd numbers are also higher by about 1 percent. Winter
farrowings are expected to be up 2 percent and next spring
farrowings up 1 percent.
"The number of pigs per litter is expected to be high this
winter, due to the mild winter, and will continue to set new
records throughout the year."
Over the past two years, the breeding herd has risen by a
modest 2 percent, representing 120,000 more animals. Regionally,
this expansion has come in two locations. The first is in the
eastern Corn Belt (Indiana Illinois, Ohio, and Wisconsin), where
breeding herd numbers have been up 80,000 head. The second is in
the Central Plains (Colorado, Kansas and Nebraska), where
numbers were up 40,000 head. Most other areas have seen only
slight changes.
Record pork production of 21.4 billion pounds is expected for
2007. Slaughter numbers are expected to reach 107.3 million
head.
"This will be the sixth consecutive year of record pork
production," said Hurt. "The growth of pork exports is the
reason for this continued U.S. industry growth. Exports rose by
1.4 billion pounds from 2002 to 2006, while domestic consumption
was about unchanged.
"A critical question for the future of the U.S. pork industry
is: How will the diversion of so much corn to fuel impact the
U.S. industry's ability to grow the export market in coming
years?"
Hog prices are expected to remain relatively strong in 2007,
given record-high production. Prices for live animals are
expected to average about $48 per live hundredweight, or $64.50
on a carcass bid. This compares with $47.34 in 2006 and $50.10
in 2005.
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 "Prices are expected to average in the mid-$40s in the first
quarter of 2007 and then move up to averages near $50 for the second
and third quarters before falling back to the mid-$40s in the final
quarter," said Hurt. "Yearly price highs would be expected in late
May and June, with prices reaching the low to mid-$50s, and year
lows would be both at the beginning of the year and at the end of
the year, in the very low $40s."
Anticipated costs of production based on closing prices of corn
and soybean meal futures on Jan. 5 are expected to average near $47
in 2007. This compares with a $40 average for 2005 and 2006
combined. Given expected prices at $48, this means an expected
return of only $1 per live hundredweight, or near break-even.
"The dynamics of corn and meal prices in 2007 now appear to be a
larger concern than hog prices," said Hurt. "So far, the $4 futures
ceiling has held corn prices. Volatility is likely to remain high,
and this may mean opportunities to buy corn and meal on the dips.
"At this writing, July 2007 corn futures were $3.80 per bushel,
and the options market determined odds of prices moving to $4.25
were 31 percent and to $4.50 were 22 percent. These are reasonably
large odds, and many producers will want to consider some price
protection measures."
Four prices strategies come to mind, he noted. The first is to
acquire as much cash corn as is possible this winter for feeding
needs through midsummer. Ownership costs are generally less than
price premiums through midsummer. In addition, as more ethanol
plants come on line, basis levels are expected to strengthen as
well.
Second, buy corn futures on the breaks. Third, buy corn call
options on the breaks. Fourth, set a purchase price range by both
buying calls and selling an equal number of out-of-the-money puts.
"Spring and summer growing conditions will be a major concern as
well," said Hurt. "Since 1975, the odds of having U.S. corn yields
drop by 5 percent or more has been 22 percent.
"Unfortunately, for corn users, if that were to happen in 2007,
corn prices would be expected to rise sharply, perhaps to record
levels."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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