March 27, 2000
STRONG HOG PRICES WILL OUTPACE
POTENTIAL GRAIN PRICE INCREASE
Hog producers can look forward to
strengthening hog prices into the summer, and for a year of profitable
prices. Even drought concerns are not likely to force grain and
feed prices so high that losses would result. Perhaps the best
news from the USDA's March Hogs and Pigs report is that the nation's
breeding herd continues in contraction. Breeding herd numbers
are down 5 percent compared to March of 1999, and down 10 percent
compared to the same period in 1998.
The market herd was reported to
be down 3 percent, with 3 percent fewer pigs in each of the weight
categories. This means that the number of hogs available for slaughter
will be down about 3 percent in the March to August time period.
Pork production, however, will be down only 2 percent since weights
will likely be about 1 percent higher than last year.
Sow farrowing intentions were down
4 percent for the spring and 2 percent lower for the summer of
2000. Given a 1 percent increase in the number of pigs per litter
and 1 percent higher market weights, pork supplies will be down
about 2 percent this fall, but about unchanged this winter.
There will be sharp differences
in market supply by region. While national hog supplies this spring
and summer will be down 3 percent, supplies in the eastern corn
belt will be down 12 percent, and those in the western corn belt
will only be down 1 percent. The large declines in the eastern
corn belt are led by disproportionate reductions in breeding herds.
In the east, breeding herd declines in the March report were:
Wisconsin -24 percent, Ohio -18 percent, Indiana -17 percent,
and Illinois -9 percent. In the western corn belt, breeding herd
reductions were more moderate with Nebraska -7 percent, Missouri
and Iowa -5 percent, and Minnesota -3 percent. In addition, the
states of Oklahoma and Colorado increased their breeding herds
by 7 percent and 11 percent, respectively. Some of these added
supplies will find their way into finishing and processing in
the western corn belt. Supplies will be very tight in the eastern
corn belt, while western supplies will be nearly unchanged from
There will be 2.5 to 3.0 million
fewer hogs available for eastern corn belt plants this year. This
means that hog price premiums will be stronger in the east, that
some hogs will need to be transported from west to east, and that
eventually some plants will have to slow their production lines
in the east.
Hog prices are expected to rally
in late-April and May from the lower $40s to the higher $40s.
Peak summer prices could come in June, with extreme daily highs
reaching the $50 level, or even low $50s. Summer prices are expected
to average in the $46 to $49 range. Seasonal reductions in price
are expected for the fall, but sharp decreases are not likely.
Fall prices are expected to drop into the $42 to $45 range, with
winter prices only a few dollars lower. Over the next year, these
price estimates average about $44. Current production costs for
farrow-to-finish operations are around $38.
One of the interesting questions
is how much higher would corn and meal prices have to be this
summer before hog producers would be thrown into losses? The answer
is surprisingly high. To have corn and soybean meal prices drive
costs from $38 per hundredweight to the expected average price
of $44 for the next year would require $2.90 per bushel corn and
$230 per ton meal, about 35 percent higher than current prices.
Assuming hog prices this summer will average $47.50, corn and
meal prices would have to increase to about $3.40 per bushel and
$270 per ton, respectively, to move hog producers into losses.
In conclusion, if hog prices do rally as expected this spring
and summer, it is very unlikely that grain and meal prices can
move high enough to initiate a hog liquidation. This is especially
true with nearly 1 billion bushels of wheat in carryover from
the 1999 crop which can serve as a hog feed reserve.
Hedging summer lean futures prices
in the very high $60s and low $70s should be considered. However,
the history of the hog cycle suggest that futures tend to underprice
the eventual price of hogs during cycle price peaks. For this
reason, those producers who can take some price risk should not
forward price more than 50 to 70 percent of expected summer production.
Cash price estimates for the fall and winter suggest that lean
futures should be priced in the very high $50s or low $60s. To
date, futures have not achieved these levels. Producers are advised
to wait until this spring and summer to make forward pricing decisions
on fall and winter production.
When forward pricing, producers
will want to consider selling futures rather than forward contracting.
Packers saw extremely weak basis levels in the last two years
and are reflecting these low basis values in forward cash bids.
When producers sell futures, they take the basis risk. Basis levels
will likely be much better for producers this year than bids currently
reflected from packers. Some packers offer the service of selling
futures for their producers, otherwise producers will need to
use a commodity broker.
While corn and soybean prices will
not likely move high enough to erode all of the profit potential
for hog producers, higher feed prices can cut into the profit
potential. For this reason,some protection on feed needs seems
to be prudent for the last-half of 2000 and early 2001. This may
mean covering 25 to 35 percent of feeding needs with futures or
Issued by Chris