June 1, 2004
WILL LUCK HOLD FOR HOG PRODUCERS?
Every once in a while something good happens
to hog producers. Facing a potential feed cost crisis in the
early spring, financial relief came in the form of sharply
lower feed prices and surging cash hog prices since early
April. Now the question, will this good fortune continue?
Hog prices deserve attention first. What a year so far! Pork
production is up more than 4 percent in 2004, yet hog prices
are up 28 percent. At an average of $47.50 so far for the
year, the average price is more than $10 per live hundredweight
above the average for the January through May period of 2003.
The more important issue is why. There are three reasons.
First, pork exports have been remarkable. In the first quarter
of the year, pork exports rose by 27 percent as some world
buyer''s heavily substituted pork for restricted beef and
broiler imports. Mexico increased pork purchases by 88 percent
in the first quarter as beef purchases from the U.S. dropped
by 86 percent. Canadian purchases of pork increased by 31
percent as beef purchases dropped by 95 percent. The Japanese,
on the other hand, purchased only seven percent more pork.
Pork export prospects continue to be strong as restrictions
on beef exports are now expected to remain in place for much
of the year.
The second factor driving much higher hog prices is the robust
U.S. economy and diet trends. Disposable personal income rose
by six percent in the first quarter of the year. Real GDP
growth was a healthy 4.4 percent. Strong consumer demand,
driven by purchasing power and high protein diets, has resulted
in wholesale pork prices being sharply higher in the first
five months of the year. Pork belly prices were up 18 percent
higher; loin prices were up 22 percent higher, and ham prices
were 28 percent higher than in the same period in 2003. Forecast
for the U.S. economy remain optimistic, with a 4.5 percent
expected real growth in GDP this year and around four percent
Finally, producers have been getting a larger share of retail
pork expenditures. So far this year, producers have received
29 percent of the retail dollar spent on pork compared to
only 24 percent last year during the same period. Marketing
margins have narrowed for both packers and retailers.
Will each of these factors remain positive for the remainder
of the year? The best answer now appears to be yes. Movement
to open export markets for beef and broilers remains slow.
World and U.S. economic growth appears to remain favorable
and producers'' share of the retail pork dollar should remain
The negative side remains supply. Pork production will be
at a record 20.6 billion pounds, a 3 percent increase from
production of a year ago. However, extraodinary demand has
won the battle so far, and pork supplies should begin to moderate
in September and move lower than year-earlier levels in the
Prices for 51 to 52 percent lean carcasses on a liveweight
basis are expected to average in the very high $40s this summer
before moving to the low $40s this fall. Winter prices are
expected to be in the mid $40s. Lean hog futures prices are
well ahead of these forecasts for the this summer and appear
to offer excellent hedging opportunities.
Everyone knows that feed prices will be volatile for the
next couple of months. After a tremendous start to the planting
season, the remainder of the soybean crop will be late-seeded,
and excess moisture may have reduced the yield advantages
of the early start for corn. Futures prices for lean hogs,
corn, and soybean meal provide profit opportunities for hog
producers this summer, and roughly breakeven opportunities
for the fall and winter.
Most hog producers feel they got a bit of luck with much
higher hog prices than expected and a major break in corn
and meal prices, but now they need to ask if luck will hold
for the rest of the year. As the old saying goes, ""Those
who think the rabbit''s foot brings good luck should remember
it wasn''t so lucky for the rabbit.""
Issued by Chris Hurt