June 2, 2003 
HOG PRICES WILL GET CANADIAN BOOST It's
been a while coming, but hog producers have just seen their operating margins
break back into positive territory. Operating losses have been the rule since
March 2002 when hog prices dropped below $40 per live hundredweight. They have
generally averaged below the $40 mark until last month. Mounting losses last summer
and the higher feed prices resulting from last summer's drought have caused producers
to cut back on the size of the breeding herd. The cut back was modest last summer,
but has continued to gain steam such that the current herd size is down about
three percent. The reduced breeding herd size has
already begun to be reflected in reduced pork production. Pork supplies have been
down about three percent over the past two months and supplies will likely continue
to stay down. Pork supplies for the summer and fall are expected to be down about
2 percent. Hog prices will get some upward encouragement
from the demand side as well. The cow that tested positive for BSE in Canada should
have some upward spin for hog prices. So far, beef demand in the U.S. seems to
have been little affected. This means that the much larger impact has been from
the reduced beef supply coming from Canada. In 2002, the U.S. imported 1.7 million
live cattle and 1.1 billion pounds of processed beef. In total, this amounted
to about eight percent of all beef consumed. The reduction of this amount of beef
supply seems to be the dominating impact, as live cattle prices have topped $80
per live hundredweight in June for the first time ever. Pork demand will be enhanced
as consumers respond to the record high retail beef prices with some substitution
of pork. The trade picture should also begin to
turn more friendly for pork producers. Japan and South Korea have also shut off
imports of beef from Canada. While this will be most positive for beef exports
with known U.S. origin, it will also increase pork exports to these two major
buyers. Of course, U.S. pork exports to Canada may be reduced, but this impact
could be much smaller as exports so far this year to Japan and South Korea are
nearly six times larger than pork exports to Canada. Exchange
rates are another positive development for live hog prices, particularly with
Canada who has been supplying about six percent of our live hogs. The U.S. dollar
has dropped in value relative to the Canadian dollar by 13 percent this year.
The strengthening Canadian dollar provides less incentive to ship hogs to the
U.S. for finishing and processing. However, it will take more time for this impact
to develop as most of these hogs enter the U.S. on coordinated finishing contracts.
Finally, the U.S. economy shows signs of emerging
from its long period of slow growth, at least as forecast by the current rising
stock market. Faster growth in consumer incomes would have a small, but positive,
impact on hog prices.
So what do these fundamentals
mean for hog prices? Clearly, declining hog numbers in the U.S., the potential
for reduced Canadian imports, and improving demand should mean better times ahead
for hog producers. Live hog prices are expected to
average in the low to mid $40s this summer, and drop back to the very high $30s
to low $40s for the fall. If so, the year would show a modest positive margin
for many hog producers. Lower feed prices are also expected by the fall if weather
is near normal this summer. Profit prospects for 2004 should be favorable, with
some continued reduction in pork supplies, smaller beef supplies, lower costs
of production, and the improving economy we have all been waiting for.
Issued
by Chris
Hurt
Extension Economist
Purdue University  
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