January 5, 2004
PORK INDUSTRY FACES ANOTHER TIGHT MARGIN YEAR
What will the new year bring for
the pork industry? How will producers respond to higher feed prices?
How will BSE USA impact hog prices? Will producers finally get back
to profitability in 2004?
First, a look at the supply prospects for 2004. The USDA's December
Hogs and Pigs report indicated that the breeding herd is down 1
percent, but the market supply is up 2 percent. Producers intend
to farrow 2 percent more sows this winter, but cut back by 1 percent
in the spring. If so, production in 2004 will be nearly unchanged
from the 2003 record of 19.8 billion pounds. With population growth,
this means that production per capita will drop about 1 percent
and provide the foundation for a modest improvement in prices.
The issue of BSE USA will also be an influence in 2004. The exact
outcome is uncertain, but "best estimates" can be made
at this time. On the domestic front, expect to see retail beef prices
drop by 10 to 12 percent. Lower beef prices will tend to result
in some reduction in pork demand. However, these "cross effects"
are relatively small for today's consumer, so we anticipate only
about a 1 percent reduction in pork demand is anticipated to result
from the lower retail beef prices.
The second component of BSE USA is the loss of beef exports and
the question of how much additional pork importers will buy from
the U.S. These estimates are much more difficult since there is
not a historical precedence to draw upon. Japan, Mexico, and South
Korea were the major buyers of U.S. beef in 2002, accounting for
a remarkable 2.0 billion pounds of the 2.4 billion pounds of beef
exports. How much of this will come back to the U.S. in the form
of additional pork exports? No one knows the answer, but the Japanese
have an import safeguard which triggers when the volume of pork
imports reaches a 19 percent increase compared to the average of
the last three years. This may limit the increase in their pork
imports to about 20 percent. South Korea has a fairly low cost domestic
pork production industry which will likely limit additional purchases
of U.S. pork. Mexico will likely buy more U.S. pork, but is not
as large a pork importer as Japan. Assuming that beef imports are
restricted for six months, these positive pork demand impacts might
reach 1 percent of U.S. production, although there remains considerable
uncertainty. In summary, the negative demand impacts from lower
U.S. beef prices may be roughly offset by the positive impacts of
the lost beef exports.
The issue of what happens with BSE Canada and the potential opening
of their beef export markets in 2004 is also important. After their
May 20th announcement, the flow of market hogs to the U.S. increased,
representing an additional supply of about 1.5 percent of U.S. slaughter.
This depressed U.S. prices by about $2 per live hundredweight. If
Canadian beef exports resume sometime in 2004, beef prices will
rise in Canada and fewer market hogs will be sent to the U.S. The
much stronger Canadian dollar will also help trim incentives for
Canadians to send market hogs to the U.S. in 2004.
Hog prices are expected to rise by about $2 per live hundredweight
in 2004, to an average of about $41. Prices are expected to move
toward $40 by late winter and into the mid-$40s by late spring.
Prices are expected to be in the lower-to-mid $40s, in the summer
and drop to an average in the very-high $30s in the last quarter
of the year.
Unfortunately, hog producers may also have higher costs of production
to deal with in 2004. Using current futures prices, higher corn
prices are expected to increase costs by about $.20 per live hundredweight
compared to 2003. Higher soybean meal prices are expected to increase
costs an additional $1.20 per live hundredweight. Thus, overall
costs may rise by about $1.50 with hog prices rising about $2 for
the year. This would mean little improvement in the overall profitability
for 2004. It is estimated that producers lost about $1 per live
hundredweight, in 2003 and that losses would be reduced to about
$.50 in 2004.
Some further reduction in the breeding herd will likely be required
to bring the industry back to profitability. The reduction in farrowing
intentions for the spring 2004 quarter suggests the industry is
moving in that direction. Producers must also watch feed ingredient
costs. It is likely that the required soybean rationing has not
yet occurred and that tight world stocks of corn could still mean
higher prices. Many factors point to a period of tight world stocks
of grains and soybeans and an era of higher and more volatile prices
than during the 1998 to 2002 period. The hog industry may still
have to reduce pork supplies to meet the reality of this higher
Issued by Chris Hurt