Hot temperatures are hard on hogs and hot corn prices are hard on pork producers, but we’ve not reached the peak yet on either one, so let’s pull in the pork production and marketing gurus around the Midwest to hear their thoughts of what is in store for pork profitability. Keep in mind that much of their analysis is based on the June 1 Hogs and Pigs Report, released about 10 days ago by USDA. OK, who wants to go first?

Chris Hurt at Purdue, in his latest newsletter, says producers have enjoyed strong profits the past couple years, but the June 1 report did not indicate any serious expansion in production. That means profits will continue, albeit modest, for the next 12 months. However, that thin profit is threatened by the cost of corn, depending on how expensive it becomes.

Shane Ellis, in his newsletter from Iowa State, says, “Slaughter weights have remained heavy with plenty of cheap corn. As the ethanol industry adds demand for corn, corn feed costs could be higher than previous years. Finishing weights for slaughter hogs may decrease if corn becomes more expensive.”

Pork expansion has been stymied by some other reasons, according to the newsletter of Glenn Grimes and Ron Plain at the University of Missouri. They say, “The memory of 1998 and 1999 is still fresh in the minds of most hog producers, the more concentrated industry limits short-term flexibility, the high costs of facilities, and the permitting process for building new facilities is slow.”

One economic issue that Mike Brumm of the University of Nebraska highlights in his newsletter is the cost of fuel, which will reduce profits in coming months. “With transportation expenses rising significantly in response to rising fuel prices, it would seem logical that any future investments in production facilities, both farrowing and wean-finish, will include consideration of the cost to transport weaned pigs to finishing facilities and the cost to transport slaughter ready animals to slaughter plants.”

Brumm agrees with his colleagues that the June 1 Hogs and Pigs Report provided totals that were somewhat neutral to the market, and provided little surprise. However, he says there were some indications that structural change may be in the offing, particularly in Indiana and Minnesota:
• “Indiana may be the state with the biggest breeding herd expansion plans. The large jump in farrowing intentions for the September-November period corresponds with rumored construction completion dates for several breeding herd projects in the Hoosier State. The lack of any increase in farrowing intentions for the majority of states also corresponds with trade expectations of limited overall US expansion.
• Another state that continues to change in regard to the structure of it’s swine inventory is Minnesota. Historically a state that had similar percentages of the breeding inventory and the kept for market inventory, Minnesota now has 11.14% of the kept for market inventory and only 9.74% of the breeding inventory. The difference in inventory is mostly accounted for by the large influx of Canadian born feeder pigs. Minnesota is the number 2 state (behind Iowa) for Canadian feeder pig imports.”

Nebraska’s Brumm also suggests that US pork producers may have some Canadian partners. “The strong Canadian dollar relative to the US dollar (>$1.60 CD per US D in early 2002 versus $1.11 CD per US D today) means these producers view ownership of pigs and facilities in the US as a hedge against the US-Canadian exchange rate. In addition, ownership of pigs and facilities in the upper Midwest gives them access to relatively cheap feed ingredients.”

Even with those significant headlines from the pork industry, what prices should a pork producer plug into his cash flow for the coming year? Our specialists pretty much agree!
• Chris Hurt says, “Third quarter prices are expected to average in the $46 to $48 range. A transition from high prices in the high $50s in early-July to the mid-$40s by the end of September is expected. For the fall and winter quarters, prices are expected to average about $44. Some improvement is anticipated into the spring of 2007, perhaps pushing prices to an average near $46.”
• Shane Ellis says Jul- Sept: $50-52, Oct-Dec: $42-45, Jan-Mar: $40-43, Apr-Jun: $45-48.
• Grimes and Plain say, “For the third quarter, we expect 51-52% lean hogs to average between $45.00 and $48.00 per cwt; the fourth quarter, between $42.00 and $45.00 per cwt; the first quarter of 2007, $40.00 to $43.00 per cwt; and second quarter of 2007, $44.00 to $47.00 per cwt.”

Oh, yes, a couple more things, says Purdue’s Chris Hurt. One threat to the pork market is the reopening of the Asian market to US beef. That means pork exports will decline somewhat. A threat to the cost of production is the potential for rising corn prices, either from a production shortfall or an increased demand from ethanol plants. Hurt says, “It may be time to fill every inch of space with corn as the last of the relatively cheap corn may be available late this summer and fall. With ending stocks of over 2.0 billion bushels, basis levels should be weak and futures premiums for next spring and summer are large. This means that ownership of cash corn from now through harvest will likely pay handsome dividends for hog producers.”

Summary:
USDA’s Hogs and Pigs Report suggested little change from the status quo in pork production. As a result, Extension pork specialists expect continued profitability over the next 12 months, although profits might be slim from increased production costs. One recommendation was to acquire corn at bargain prices, with anticipated higher costs in coming months. Another production cost issue will be higher transportation costs from fuel prices if hogs have to be moved. Some structural changes are underway in the industry with facility construction in Indiana, pig numbers increasing in Minnesota, and Canadian investments in the US pork industry.