"Slaughter numbers in the past two weeks have been up 6 percent,
when only about 1 percent more hogs were expected," said Chris Hurt.
"This has caused a $10-per-hundredweight drop in live prices since
late July, with prices now in the low $60s.
"The source of those extra hogs is probably related to some
delayed marketings due to the summer heat, to a desire to sell pigs
more quickly before prices really tumble moving into fall, and to
high sow slaughter. Projected prices for the final quarter this year
are in the mid-$50s, using current lean hog futures as a base.
Tragically, costs of production are expected to be above $75 per
live hundredweight for the remainder of the summer, this fall and
winter," Hurt said.
Hurt predicted losses per head this summer at an estimated $30,
followed this fall by record quarterly losses of $60 per head.
Losses in the first and second quarters of 2013 are projected to be
$38 and $5 per head, respectively. Over this one-year span, losses
may average about $33 per head, meaning total losses of around $4
billion for the U.S. industry.
"There is strong evidence that the initial wave of breeding-herd
reduction began in early August and has intensified," Hurt said.
"Sow-slaughter data show that around 30,000 sows were liquidated in
the month of August alone. This would represent a reduction of about
0.6 percent of the national sow herd in one month. This rate will
continue, and perhaps even increase, if corn prices stay at current
levels or move higher. The breeding herd may decline by 4 to 6
percent in the six months from August 2012 through January 2013. The
rate of liquidation is expected to slow sharply after this coming
winter," Hurt said.
Hurt described the dilemma for the industry to be the enormous
losses for pigs that are already born. Continued liquidation of sows
will not reduce slaughter numbers until next summer and so does not
address the short-term financial disaster.
"Short of euthanizing young pigs, reduction of weights can reduce
total pork supplies, use less feed and enhance hog prices," Hurt
said. "The economics of reducing weights is largely related to
packer-buying programs. Generally, it is not economical for
producers to sell at lighter weights that receive a discount.
Perhaps packers would consider lowering those threshold weights in
this emergency. Producers should recognize that this could be costly
to packers and to not expect one packer to do so unless all agreed,"
he said.
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Hurt said that President Obama authorized the purchase of a
modest amount of pork.
"That volume is so small as to reduce the losses by less than $1
per head," Hurt said. "Other demand stimulation could help increase
pork prices, but the program would need to be much larger and more
money would likely have to come from a Congress that has not had a
strong record of agreement or accomplishment in recent months."
There remains a small amount of hope that a partial waiver of the
ethanol RFS for 2013 could reduce corn use for ethanol and lower
corn prices. However, evaluations at the University of Illinois,
Purdue and Iowa State all indicate that such a partial waver may
have only small effects on the volume of corn used for ethanol.
"Financial losses of the magnitudes projected here will cause
massive erosions of family equity and some bankruptcies," Hurt said.
"Unfortunately, losses in 2008 and 2009 were not fully recovered by
the profits in 2010 and 2011, so that some producers face this
tsunami in weakened financial condition.
"Family hog farms with a sizable land base will have land equity
to draw on," Hurt said. "Larger hog producers with a minimum land
base will need to draw on corporate equity and then their lenders.
Lenders will make the final decisions for the weakest but will
strive to keep companies in operation as they seek new buyers. This
means that another round of consolidation of ownership can be
anticipated," he said.
Hurt concluded by saying that unfortunately, individual producers
are going to need to find their own way through the short-term
carnage.
"The irony is that hog production may return to profitability by
midsummer 2013 when meal prices begin to moderate, hog prices move
to record highs, and rain and reasonable temperatures bless our
nation's corn and soybean fields once again," he said.
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences] |