June 28, 1999
NO WAY OUT OF HOG PRICE PROBLEMS
June Hogs and Pigs report was a shocker. The lowest prices
of the century still have not convinced enough producers to reduce
supplies. In addition, low feed prices will increase market weights.
As a result, the industry will not return to profitable price
levels over the next year as had been anticipated prior to the
report. Pork supplies are expected to be down a meager 2 percent
over the next 12 months, not enough to spur higher prices.
The report indicated
that the market herd on June 1 was down only 2 percent from year-ago
levels, and that the breeding herd was down 6 percent. While these
numbers are headed in the right direction, they do not reflect
an aggressive enough liquidation of the herd.
The number of hogs
available for market this summer was estimated to be down 3 percent.
However, with market weights expected to be up by 2 percent, this
means only a slight reduction in pork supplies. In addition, there
is concern that USDA had too few hogs in their count for this
summer. The number of hogs weighing over 180 pounds on June 1
was reported as up 2 percent.This is the pool of hogs for June
processing, and those numbers have actually been up about 5 percent.
It was fall and
winter supplies that devastated hog prices last year, and prospects
are for only modest reductions this year. Pigs weighing under
60 pounds on June 1 were reported as down 5 percent, but with
2 percent higher weights this fall, pork supplies will only be
3 percent lower than the records last fall. Winter supplies will
come from the summer farrowings, which are reported to be down
4 percent. With 1 percent more pigs per litter and 2 percent heavier
weights, pork supplies this winter may only be down 1 percent
to 2 percent from this past winter.
Many of the traditional
family farms of the Midwest have given up, but too many larger
hog corporations have not reduced production, or have even continued
to expand. The hog industries of some states have been gutted.
Illinois, as an example, had a 21 percent reduction in the size
of its breeding herd. The breeding herds were down sharply in
Georgia (30 percent), Wisconsin (20 percent), Kansas (16 percent),
Indiana (13 percent), Ohio(9 percent), Iowa (8 percent), and Michigan
continued to see sharp expansion, adding 50,000 animals to the
breeding herd. In addition, the "other states" not individually
reported were only down 3 percent. This means that expansion has
continued on the southwest and western fringe of the corn belt.
The supply problems
the industry faces cannot be overstated. If favorable growing
conditions continue to push feed prices lower, market weights
could become an even larger concern than mentioned above. Record
supplies of frozen pork also loom over the market. The current
inventory report means that supplies will be sufficient to keep
frozen stocks at record levels over the next year. There is just
no window of opportunity to bring some of that pork out of the
freezers. Everyone will look to last years price disaster
in November and December and wonder how we can get through this
fall and winter given only modest reductions in pork supplies
and full freezers.
Prices of hogs on
a live weight basis for terminal markets are expected to average
only about $34 over the next 12 months. This summers prices
are expected to average about $35, but trade in a range from $32
to $38. The higher prices could come near the end of the summer.
Fall and winter prices are expected to be in the low $30s, averaging
about $32. Concerns over packer capacity and freezer space will
once again be front-page news. Hog prices could easily dip into
the higher $20s at times. Movement back toward the higher $30s
would be expected for the spring of 2000.
At this point, the
best hope for many producers is that feed prices will continue
to drop. Most producers with quality genetics receive premiums
of a least $2 per live hundredweight above terminal prices. This
means that revenues could average about $36 for many produces.
With $2 corn and $140 meal prices, estimated costs are about $35
per live hundredweight. Corn at $1.50 and meal at $100, drops
costs to about $32.
costs can be misleading. Those who have recently expanded and
are capitalizing new facilities may have costs in the $39 to $42
range. In addition, some have been forced to increase their debt
load over the last year in order to meet cash flow needs. The
outlook for these producers is not good, as the industry must
now go through further erosion of net worth and asset values.
Many pork producers will say, "We can go through one disastrous
price period, but we cant take two." The news from
the June Hogs and Pigs report is that the second wave is
on its way.
Issued by Chris