|
The amount of drain on equity depends on individual enterprises
and their financial positions. "On average, in the seven
quarters of losses starting in the fourth quarter of 2007, a
10,000-head-per-year operation would have estimated losses of
$315,000," said Chris Hurt, a Purdue University economist.
"By comparison, in the 1998-99 disaster, a
10,000-head-per-year producer would have lost $213,000 in the
seven quarters of loss beginning with the first quarter of
1998," he said.
Unfortunately, he said, current forecasts are for losses to
continue for three additional quarters, through the first
quarter of 2010, increasing accumulated losses to $396,000, so
this downturn will be both longer and more severe than in
1998-99.
Hurt said producers have been slow to reduce the breeding
herd this time around.
"In the past two years, the U.S. breeding herd has dropped by
just 3 percent. In contrast, from mid-1998 to mid-2000, the
breeding herd was down 10 percent," he said.
There are at least four potential reasons for the slower rate
of liquidation.
"The first may be that this time the industry’s losses were
primarily related to much higher feed prices. Perhaps producers
were not convinced that feed prices would stay high after their
acceleration in late 2007," Hurt said.
He said the second reason may have been a misreading of the
pork export surge in the spring and early summer of 2008,
primarily driven by China and a cheap dollar.
"That surge was the primary stimulus for live hog prices
moving from $39 in March 2008, to $58 in May and to highs above
$60 in August. Prices that high meant $5-per-bushel corn was not
as big a threat as earlier thought, and unfortunately this
delayed breeding herd liquidation. Looking back, that export
surge was a one-time unique event, as exports have returned to
much lower, but more normal levels," he said.
Third, industry structure may be a culprit in such a slow
downward herd adjustment. The industry has never had to make
such a large downward adjustment with such a concentrated set of
producers.
[to top of second column] |
"Finally, while the current string of losses has been large, profits
and net worth accumulation were large in the generally profitable
period from 2000 until the current downturn began in the final
quarter of 2007," Hurt said.
He said that by the third quarter of 2007, the average hog
producer had overcome the losses of 1998-99 and accumulated $1.45
million of profits. For the farm continuously in production since
1998, the current losses, which may accumulate to near $400,000 on
this downturn, may be coming from a high equity base.
This makes the point that all hog farms are probably not in
financial trouble.
"Those most vulnerable to the current financial losses are those
that have started production in the last three years, those that
have had large expansions in the past few years, and those that
diverted some of their hog earnings in 2000 to 2007 into assets such
as stocks or residential housing that plunged in value as well," he
said.
How much longer will the economic stress continue?
"I expect modest losses this fall with live hog prices averaging
about $40 to $42 and all costs near $45. For the winter, hog prices
are expected to be in the low to mid-$40s with costs near $46.
Profits may return in the spring of 2010 with prices rising to the
higher $40s and costs remaining in the $46-to-$47 range. For all of
2010, I expect a modest profit of $2 to $5 per head," Hurt said.
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences] |
