Pork industry defies economic odds

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WEST LAFAYETTE, Ind. — Recent hog prices are described as a “miracle” by a Purdue University Extension marketing specialist, who compares the high prices to an answered prayer.

“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.

Modest cuts

“Earlier, I suggested it would take a 6-8 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 liveweight 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 turn-around 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.

Defying economics

“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.

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.

“Thank goodness for miracles and thank goodness economists’ bleak forecasts aren’t always right.”
Chris Hurt
Purdue University Extension
marketing specialist

Trade enhancement

The bottom line, he said, 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 were nearly seven times larger. Chinese purchases were up nearly three times. Exports to Russia were more than double and exports to Japan rose by 8 percent and to Korea by 27 percent.

“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

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.”

Production costs

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 May 19, and adjusting for historical basis levels, hog prices would average about $54 for the second quarter and $55 for the summer.

Future prices

“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.”

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