January 3, 2005
HOG PRODUCERS SAY NO EXPANSION
Hog producers across the country say they
have not expanded the breeding herd yet, and that they will
keep farrowings at about a constant level in coming months.
The latest Hogs and Pigs report from USDA revealed that the
breeding herd in the U.S. was down slightly from a year earlier,
and that farrowing intentions for this winter and coming spring
would be about unchanged as well.
The seeming unwillingness of pork producers to make fundamental
changes in the sizes of their herds has continued for a number
of years. Since 2000, annual farrowings have been nearly steady
at 11.4 or 11.5 million sows. The current numbers were a surprise
to market participants that felt the very good profits since
the spring of 2004 would begin to show up as breeding herd
There are several reasons why expansion is not yet being
demonstrated. First is that some producers likely used the
much improved hog prices in 2004 as an opportunity to finally
leave the industry. Breeding herd numbers were down by 3 percent
in Indiana, Ohio, North Dakota, and South Dakota, and by 4
percent in Nebraska. They were also lower in some of the states
in the mid-south and southeast with Georgia (-12 percent);
Kentucky (-11 percent); and Tennessee (-8 percent). These
declines were largely offset by higher breeding herd numbers
in Iowa (+1 percent) and Illinois (+2 percent), with several
major production states being unchanged (North Carolina, Minnesota,
A second reason that expansion is not yet showing up is that
it remains very early in the profit cycle for expansion. The
return to profit did not occur until the second quarter of
2004, so this would mean the spring of 2005 before farrowings
would begin to increase. In addition, some of the strength
in 2004 hog prices was related to improved pork exports that
were positively affected by restricted U.S. beef exports.
Producers are aware that a return of beef exports this year
could have a negative impact on hog prices. Finally, U.S.
producers have been hesitant to expand in the face of rapid
breeding herd expansion over the past five years in Canada
with most of those pigs being shipped to the U.S. The breeding
herd expansion in Canada since the start of the decade is
equivalent to about a 6 percent expansion of the U.S. breeding
So what does this mean for pork prices? Limited expansion
means that 2005 pork supplies will only be about 1 percent
higher. Most of this increase will come from higher marketing
weights which are expected to be up by .7 percent. The $52.63
per live hundredweight average prices for 2004 came largely
because of strong demand, so the most important question for
2005 prices is, "will demand be as strong in 2005?"
Demand is expected to be very good in 2005, but not as strong
as last year. Pork trade may not be as favorable, since beef
exports are expected to resume at some point. Marketing margins
for pork (packer and retail) were very narrow in 2004, and
are expected to widen to more normal levels in 2005 which
will cause some lowering of farm prices. Finally, high protein
diets received a great deal of media attention in 2004 which
helped stimulate demand. This may not be repeated to the same
extent in 2005.
Even with some leveling off of demand, 2005 looks extremely
positive for pork producers. Prices for 51 to 52 percent lean
hogs on a liveweight basis are expected to average in the
low $50s for the year. Prices in the first quarter are expected
to be in the very high $40s on average, followed by prices
moving into the mid-$50s for potential yearly high prices
in May and June. Summer prices are expected to average in
the very low $50s with the final quarter of 2005 still holding
price averages near $50.
More importantly, there will likely be lots of income with
costs of production in the higher $30s. My current estimates
are for profits of nearly $13 per live hundredweight above
all costs, which will exceed the nearly $10 of profit in 2004.
This could be the most profitable hog year since 1990.
The last statement brings up the issue of whether producers
can resist expansion in the face of this robust profit outlook.
Probably not. My guess is that it is reasonable to expect
more pork to begin showing up by late in the summer with prices
in the final quarter lower than those currently stated. But
even with that possibility, 2005 may still feel like "Hog
Issued by Chris Hurt