farmgate: Pork Prices: Red Ink Or Black Ink?
USDA’s Quarterly Hogs and Pigs Report is now factored into the market without too much of an economic burp. As expected inventory, farrowing intentions and the future hog slaughter will be up slightly. But we all know there are some factors behind the numbers that will wrench the market from time to time, so let’s explore what the report did not tell us.
What about all of those Canadian hogs that had been southbound when corn prices were high in Canada and producers were in a liquidation mode? John Lawrence at Iowa State expects fewer hogs from Canada this year. While market weight hogs from Canada were down 2% in 2006, there was a 12% increase in southbound feeder pigs. He says the Canadian pig crop is down, along with farrowing intentions compared to last year. “To put this in perspective, the Jul-Sep decrease is the second decrease in Canada in 10 years as their pork industry has grown. The other decrease was Oct-Dec 2005. A stronger Canadian dollar and a moratorium on hog buildings in Manitoba are expected to slow growth of the Canadian herd. As a result we may see fewer slaughter hogs imported to the US for slaughter.”
On the other hand, Lawrence says exports have been strong, even to the point of hiding a softer domestic market for US pork. “US pork exports Jan-Oct were 11% higher than the year before. This will make 15 of the last 16 years that pork exports have set a new record. Pork exports to Japan, our largest customer, were down 7.4% through October, as were exports to mainland China. Volume to the other major export markets was higher.”
The soft pork market in early 2006 has been reversed a bit, according to Glenn Grimes and Ron Plain at the University of Missouri, “The summer and fall strength of 2006 appears to have pushed demand for live hogs back to the 2004 high. Contributing to the live hog demand strength is pork export growth, population growth in the U.S., and increased slaughter capacity in the U.S. If we can hold the strong live hog demand of the fall of 2006 through 2007, live hog prices for 2007 are likely to average the same as in 2006 to a couple of dollars lower. The challenge to hog producers will be higher corn prices, which may push the breakeven price for average-cost producers to $50-51 per cwt for 2007. If so, the odds are high for modest losses for the year for the average-cost producer.”
Iowa State’s Lawrence agrees, and he has been reworking his calculations for estimated returns for pork producers, based on higher prices of corn. “The revised numbers suggest that it takes approximately 12 bushels of corn to produce a hog farrow-to-finish and the new weight is 270 pounds. Thus, a $1/bushel increase in corn prices will result in a $4.44/cwt (live) increase in cost of producing hogs or about $6/cwt carcass weight. Given the now higher corn prices and price forecast, pork producers may see some red ink during the first quarter of 2007. Summer prices should be higher than cost of production unless corn and/or soybean meal prices increase further. If we have sustained corn prices in the mid-$3.00/bu range producers are expected to be in the red again in the 4th quarter.”
If that is the case, Grimes and Plain at Missouri say it has been quite a ride for the pork producer, “The average-cost hog producer had enjoyed 34 consecutive months of profit at the end of November based on Iowa State University data. The probabilities are good that December 2006 was profitable for the average-cost hog producer. However, as we get near $3-plus corn into hogs, the winter hog-price rally will have to be quite strong to outpace production costs and keep the bottom line black.”
Summary:
With the pork inventory up, and producers signaling an increase in both the breeding herd and farrowing intentions, overall pork prices may not be as profitable in the coming year as they have been in the past three, all because of higher feed costs. Livestock economists say domestic demand is strengthening, export demand is high, imports have slackened, but the cost of production will be a challenge for producers who will start seeing their books with more and more red ink during 2007.
Posted by Stu Ellis on January 4, 2007 1:17 AM to farmgate