There is no secret that corn growers are enjoying the result of a market demand driven by ethanol, exports, and feed. However, the pork producer, fearful of being pinched by high corn prices, is also enjoying a demand-driven market. In a period of high feed costs, margins should be thin to non-existent. But that has not been the case, and pork production balance sheets are printed with black ink.

That is not to say that pork profits would be much higher with $2 corn, however profitability in the pork industry has fortunately remained despite corn prices floating from $3.50 to $4. At Purdue, economist Chris Hurt says, “Since the end of March, hog prices have seen a strong seasonal surge, actually putting some green in bank accounts of hog producers. Hog prices were about $42 in late March, but rallied as high as $54 in the past few weeks. Current costs of production are estimated to be in the $47 to $49 range for farrow-to-finish production.”

The existence of the slim margin for pork producers comes despite the fact that more pork is being produced. Hurt says output of packing plants has been 2.5% higher in the first four months of the year, compared to last. And parallel to that are hog prices that are 10% higher, but that is not the result of more demand by the US consumer. Hurt and his Cornbelt colleagues say it is the result of international pork trade and greater marketing margins.

Pork Exports. Simply put, exports are up 3% and imports were down 8%, and the resulting volume difference was a 10% increase in benefit to the US pork producer. At Iowa State, livestock economist Shane Ellis says, “Pork exports in 2007 are greater than a year ago, but most of that was the result of high January exports. Exports in February and March were below those of a year ago. A large portion of the additional January exports were destined for Japan. Between foreign and domestic demand utilizing the increasing US pork supply, hog prices will be supported and above those of a year ago.” At the University of Missouri, livestock economists Glenn Grimes and Ron Plain agree with Ellis, and add that exports to Mexico were down more than 20% in February and almost 30% in March, but for the quarter there is still positive news. “However, the good news is that pork exports for January - March were still up nearly three percent from 2006. But another decrease of 7.6% in April, which is what we had in March from last year, will pull exports down to about last year's levels for January - April.” Ellis makes the point that export markets are shifting, “Even though Japan exports have been consistently increasing, we should remember our other foreign markets. Korean markets now have nearly five times the presence in our export portfolio.” Grimes and Plain report first quarter pork imports were down 7.7% from last year. “In 2006, net pork exports for these three months were 9.54 percent and they were 10.23 percent in 2007.” By the way, the bulk of the imports still come from Canada, and for the quarter they were up nearly 8% over last year.

Marketing margins. The second factor stimulating hog prices was a narrow retail price margin, according to Purdue’s Hurt. “Generally speaking, when packer or retail margins are smaller the producer tends to get more of the consumer pork dollars. That has been the case so far this year. Consumers have paid $.03 per retail pound more for pork, and retail margins have been $.05 per retail pound less. This translates into higher hog prices for producers. In fact, prices so far this year have averaged $46.60 compared to $42.70 during the same period last year. That’s almost $4.00 more and a welcome outcome in this period of higher costs.” Grimes and Plain agree, “All of the increase in retail prices plus some was enjoyed by hog producers. The total marketing margin for pork for January - April was down two percent from a year earlier. For April, live hog prices were up 16.8 percent from last year while the January - April live price was up 10.2 percent from 12 months earlier.” They say the demand growth for pork is from population growth, marketing margins and more exports, but pork producers should not expect the benefits from the marketing margin to last.

Outlook. Hurt says prices are strong through August, based on the futures market, but may drop into the fall period. He believes $50 will be the average price over the coming 12 months. With high prices for corn and soybean meal, profitability will be challenged in the coming months.

Summary.
There has been surprising profitability for pork producers, based on export trade and lower marketing margins for packers that have allowed a few extra dollars to go to the producer. While export demand will continue, the marketing margin benefit may not last, and pork profitability will be challenged to remain in the black over the next 12 months.