April 9, 2001
HOG INDUSTRY GETS WINDFALL PROFITS:
Hog producers are basking in a the
rare air of unexpectedly large profits. With hog prices moving
toward $50 per live hundredweight and with moderate feed prices,
its fun to raise hogs again.
The windfall is a result of somewhat
smaller than expected supplies, high retail beef prices, and especially
foot-and-mouth disease (FMD) in Europe. To add further fuel to
a bullish situation, the latest USDA Quarterly Hogs and Pigs report
indicated a smaller winter pig crop than had been expected and
that producers' plans to expand the breeding herd remain moderate.
The latest quarterly report caused
the market to reverse opinions on breeding herd productivity gains.
The new Monthly Hogs and Pigs reports had indicated that farrowings
and the number of pigs per litter were high for the winter quarter.
However, the quarterly report resulted in revisions that lowered
the number of farrowings and sharply revised downward the weaning
rate. As an example, the monthly reports had estimated the number
of pigs weaned per litter at 8.89 and 8.94 in December and January,
respectively. These were revised to 8.74 and 8.77, respectively,
in the quarterly report.
The bullish numbers came in two
forms. First, the winter pig crop was up only 1.5 percent, rather
than the 4 percent the market had been expecting. Second, producers
indicated they would expand the breeding herd by only 1 percent
in both the spring and summer quarters. The modest rate of expansion
after a full year of profitable prices relates to the cautious
attitudes of producers who still have memories of the price disaster
in late 1998 and 1999. In fact, the losses accumulated during
that period are just now being replaced by the profit stream from
the past year. A second reason was that hog prices had not been
all that encouraging from October 2000 through February 2001,
when prices at times dipped to the mid-$30s and averaged under
$40. The profit windfall, driven by higher prices, did not occur
until March, too late to be revealed in the March inventory survey.
The bullish outlook for hog prices
has three components. The first is that supplies are now expected
to be smaller than previously thought. It had been anticipated
that supplies would be up by 4.1 percent for the remainder of
this year. That projection is revised down to 2.7 percent. Second,
domestic demand has improved as a result of economically conscious
consumers shifting some higher priced beef consumption to pork.
However, the biggest of the bullish factors results from FMD in
Europe and the added U.S. pork exports that are expected.
The break of FMD in Europe is big
news for the U.S. pork industry. Pork production in Europe is
more than double that of the U.S. and Canada combined. Most of
the pork produced in Europe is consumed in Europe. However, about
3 billion pounds of pork are exported, primarily to Japan, Hong
Kong, and the U.S. The U.S. and Canada export only 3.2 billion
pounds combined. If Europe was unable to export pork, the loss
of world pork supply would about equal all of the exports from
the U.S. and Canada. To date, England, Ireland, France, and the
Netherlands have broken with FMD. The inability of those countries
to export pork could account for $2 to $4 higher U.S. prices.
All of that impact would be from France and the Netherlands, since
England and Ireland are both net pork importers. The largest European
exporter is Denmark. If FMD should break there, hog prices could
rise by an additional $4 to $6 per live hundredweight, although
that possibility may already be partially reflected in the market.
Two additional critical questions
are, How long will the higher prices last? and Will FMD visit
North America? Answers cannot be accurately evaluated. However,
the number of FMD cases continues to grow, indicating the disease
is not yet contained. USDA officials are already saying they will
look at procedures to accept European pork once the disease is
contained. This would likely be in the summer, at the earliest.
As for the U.S., the financial impact of the disease could be
disastrous or moderate, depending on how it is isolated and contained.
For this price analysis I assume
that FMD does not come to North America or Denmark and that the
spread is contained in Europe over the next month. Live hog prices
are expected to move into the lower $50s during late May and early
June. Prices may begin to ease into July and August when they
would average in the mid-to-higher $40s. By late summer, prices
could move back to the lower $40s and average near $40 in the
final quarter before dropping to the very high $30s in the winter.
Producers are strongly encouraged
to consider forward pricing opportunities for hogs to be marketed
in late May and early June. This is the time period that cash
hog prices are expected to be near their peak, and futures often
reflect some of the optimism. Hogs could be forward priced with
futures, options, or forward cash contracts with packers.
The windfall profits this spring
are likely to stimulate a greater desire to expand the herd. However,
producers should wait a few months to see how the FMD outbreak
evolves. Resolution of FMD in Europe, or an outbreak in North
America, could quickly cause windfall profits to blow away.
Issued by Chris