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"Overall, the current futures forecasts say that producer losses
will not be nearly as bad for the rest of this year as had been
anticipated," said Chris Hurt. "But the markets also agree that
it will be the spring of 2009 before the industry gets back into
the black. "Earlier, I suggested it would take a 6 to 8
percent cut in the breeding herd to return to profitability.
Now, it appears that more modest cuts may return the industry to
profits, at least if the world keeps buying 'high value' U.S.
pork. Thank goodness for miracles, and thank goodness
economists' bleak forecasts aren't always right."
Hurt was reacting to recent changes in the hog market. In
mid-March, eastern Corn Belt hog prices were $35 on a
live-weight basis. Today they are $58.
"The huge financial losses have slowed as hog prices have
recovered much closer to costs of production," he said. "What an
amazing turnaround in such a short period of time. Just how
surprising is this reversal of fortune?
"The average seasonal price increase from early April to
early June over the past five years was $11 per live
hundredweight. This year the seasonal increase has been $23 so
far -- more than double the normal increase. Next, consider this
remarkable price increase is occurring with pork production up
about 10 percent, almost defying basic economics."
Perhaps, he added, some hog producers don't want to question
a miracle, "but the rest of us want to know why."
Since supplies are sharply higher, demand is the most likely
place to look for the answer, and export demand is the most
probable source, Hurt noted.
"Unfortunately, trade data are only available through March
of this year, but that data shows a robust export period," he
said. "In the first quarter of 2008, pork exports were up 40
percent and imports were down 10 percent. The net impact was a
61 percent improvement in net trade volume.
"As a percent of U.S. production, this was 14.8 percent in
the quarter, compared to 10.2 percent for the same period in
2007. The bottom line was that additional trade enhancement in
the first quarter accounted for nearly 5 percent of all
production."
Pork producers know that pork has been cheap in the United
States, but with the rapid devaluation of the U.S. dollar, U.S.
pork was doubly cheap to some foreign buyers. As a result, in
the first quarter, shipments to Hong Kong (mostly
trans-shipments to mainland China) were nearly seven times
larger. Chinese purchases were up nearly three times, and
exports to Russia were more than double. Exports to Japan rose
by 8 percent and to Korea by 27 percent.
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"China, of course, deserves a special note, as pork production there
was reduced in 2007 by 9 percent due to disease problems," he said.
"China is in the process of rebuilding the herd but is willing to
import more pork in an attempt to reduce the inflationary pressure
on pork and food prices in general."
Domestic demand may be a reason for some of the strength in hog
prices as well, he added. Pork is cheap and the American shopper is
in a mood to look for bargains, as both food and fuel price
increases have cut into family budgets. In April, for example,
retail beef averaged $4.17 per pound and pork was $2.86. That is a
saving of $1.31 per pound.
"On a 10-pound meat purchase, that's a savings of $13 and will
buy enough gasoline to get the family vehicle another 60 or 70 miles
down the road," he said.
There may also be an almost intangible demand component in pork
right now. Some would call it "speculation"; others might say it is
"inflation expectations." This is the ideal that all agricultural
commodities must eventually have a major increase in price to
account for much higher production costs.
"It was thought that hog producers would have to cut herds to get
pork prices to rise enough to cover higher production costs," he
said. "Maybe those cuts in production will come in the form of other
world producers cutting their production such that U.S. exports can
accommodate large domestic production. If the latter case holds,
U.S. producers may not have to reduce herd size as much."
What does this mean for the future? Using futures prices for
corn, soybean meal and lean hogs on May 19, and adjusting for
historical basis levels, hog prices would average about $54 for the
second quarter and $55 for the summer.
"The fall decline would be moderate, with prices only dropping
back to $53.50, and then taking off in 2009 with the first-quarter
average at about $57.50 and the second quarter at about $64," he
said.
"Costs would be about $58 this spring, summer, fall and winter,
providing $2 to $4 of loss for farrow-to-finish operations. The
world finally brightens for hog producers in the spring of 2009 with
prices moving toward the mid-$60s, with costs near $59, for $5 to $6
in profits."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences] |
