March 29, 1999
HOG INDUSTRY TO EMERGE FROM PRICE
Hog prices will continue to recover
from their depression-era depths throughout 1999 and into 2000.
Supplies of hogs will begin to drop below year-earlier levels
by June, with more dramatic drops expected by the fall. Hog producers
can finally expect to see a return to breakeven prices in May,
with positive returns evident this summer and fall.
The USDAs March Hogs and
Pigs report shows that the number of market animals will be
up about 2 percent in April, will drop to unchanged in May, and
be about 2 percent below year-earlier numbers from June through
August. The anticipation of smaller pork supplies should help
stimulate a strong spring price rally. Hog prices should move
from near $30s per hundredweight in early April to the higher
$30s by early summer. With the cost of production expected to
be in the $36 to $38 range, the industry will finally get back
to breakeven prices sometime during the month of May. If producers
have survived to this point, they have likely made it through
the price depression.
On the opposite side are those who
were not able to withstand the ravages of the winter market. The
March report does not provide the number of producers that have
dropped out of production, but it does show a huge reduction in
breeding herd numbers, as many producers liquidated, or reduced,
their breeding herds.
Perhaps the most encouraging indication
in the current report is that hog producers are responding in
a traditional manner to economic losses. Many felt that the industry
is now dominated by larger producers who would hesitate to reduce
production when times were difficult. If so, downward adjustment
in the size of the breeding herd would be slow, if it occurred
at all. In essence, this line of reasoning suggested there is
no longer a hog cycle, meaning the industry would have difficulty
returning to profitability, and a long and pervasive period of
losses would ensue. This report provides solid evidence that the
hog production cycle is still alive.
The decline in breeding herd numbers
is especially vivid when viewed in terms of individual states.
Of the 17 major reporting states, numbers were unchanged or down
in 16 states. Only Oklahoma, where Seaboard continues to build,
had any increase in the breeding herd. The razing of breeding
herds was particularly noticeable in the Midwest, where six of
the 17 major states had double-digit declines in breeding herds,
including: Wisconsin (19 percent); Illinois, Kansas, and Michigan
(15 percent); South Dakota (13 percent); and Indiana (11 percent).
Also with large reductions in breeding herds were Ohio and Kentucky
(7 percent); Iowa and Minnesota (6 percent); and North Carolina
(5 percent). The smaller breeding herd in North Carolina was the
first year-over-year decline this decade.
A declining breeding herd inventory
means smaller farrowings this year. Producers reported that their
intentions were to farrow 7 percent fewer sows this spring and
summer. If this liquidation follows a traditional cycle, the breeding
herd can be expected to continue to drop over the next year, reaching
its lowest level in March 2000. This would mean that hog prices
would continue to improve throughout 1999 and reach their highest
levels on this cycle in the summer or early fall of 2000. Hog
prices should move from near $30s in early April, to the mid $30s
by the end of the month, and to the higher $30s by June 1. Summer
prices are expected to be in the very high $30s, with some daily
tops over $40s per hundredweight. Supplies will continue to drop
more sharply into the fourth quarter, when prices are expected
to average in the low $40s. Continuation of smaller supplies appears
to be likely for the first quarter of 2000, when prices should
be able to maintain the lower $40s. Summer 2000 prices could move
sharply higher, at least into the higher $40s, with chances for
hog prices to stretch above $50s for the first time since August
The first order of business for
most hog producers is to stabilize their financial condition.
The industry has experienced losses since December of 1997. By
the end of April 1999, cumulative losses will have amounted to
an estimated $400 per sow, or $40,000 for a 100 sow operation,
and around $200,000 for a 500 sow operation. Secondly, most will
want to avoid major new investments in the industry until the
total implications of the fallout are evident. This means waiting
until at least mid-2000 to see if hog prices can recover to profitable
levels, and to see if large corporate operations continue their
appetite for expansion. The greatest fear now for many family
hog farm owners is that very large hog producers will continue
to expand production in order to gain market share for the longer
run. If so, a period of pervasive low prices could result.
Issued by Chris