June 26, 2000
HOG PRODUCERS TO RECEIVE FINANCIAL
Pork producers continue to reduce
the size of the breeding herd and pork supplies will remain moderate
over the next 12 months. Profitable prices should remain in place,
at least through the first-half of 2001.
The nation's breeding herd on June
1 was reported by the USDA to be down 4 percent from year ago-levels
and more than 10 percent below the bloated breeding herd inventory
in 1998. Most states continued to reduce their herds, with the
largest reductions in the eastern corn belt with Wisconsin down
19 percent; Illinois down 7 percent; Indiana down 15 percent;
Ohio down 20 percent; and Michigan down 8 percent. The total reduction
for the past year in these five eastern corn belt states was 155,000
animals, representing 12 percent of their breeding herd. The downward
adjustment in the eastern corn belt has been even more dramatic
when viewed over the past two years, when 385,000 animals have
been cut, representing 26 percent of the breeding herd in the
Adjustments have been much smaller
in the western corn belt, where breeding herd numbers are down
for the last year as follows: Minnesota (3 percent), Iowa (3 percent),
Missouri (7 percent), and Nebraska (10 percent). As a region,
these states dropped their breeding herd by 5 percent in the past
year and by 10 percent over the past two years.
Some have asked, "Why aren't
producers expanding since they are now making money?" There
are multiple reasons. The first is the large amount of debt that
producers incurred during 1998 and 1999. Now that the hog enterprise
is generating positive returns, it is the desire of both producers
and their lenders to restore their equity position to a more comfortable
level. In fact, some now consider that "comfortable level"
to be an even smaller debt percentage than was the guideline prior
to late 1998. This factor will likely continue to delay expansion.
Fear is another powerful behavioral modifier at work. The depth
of losses in 1998 and 1999 was so extreme that many producers
will forgo expansion until they are very comfortable with their
financial position and with the longer-run outlook for pork production
profitability. Finally, the recent survey was conducted around
June 1, when the issue of new crop feed prices was still very
uncertain due to the forecast of drought in the Midwest.
The movement toward expansion will
likely begin this fall. By September, producers will have had
six months of profitable hog prices to restore financial reserves.
The 2000 crop size will be pretty well determined (looking like
a very large crop with low feed prices at this writing). Finally,
considerable confidence will be restored in the future of the
industry by that time and the longer-term outlook will feel more
positive. Producers confirmed this pattern with farrowing intentions
for the summer down 2 percent, but with intentions for the fall
up 1 percent.
Pork supplies will remain below
year-previous levels through this fall; by winter they could be
nearly equal; and by spring of 2001 will begin to rise above year-ago
volumes. Given the favorable demand picture expected, both domestically
and in the export market, this means a period of favorable hog
and pork prices over the next 12 months.
Terminal liveweight prices are expected
to average $48 to $51 this summer, which is several dollars higher
than the previous forecast. Fall prices will likely drop into
the $43 to $47 range for an average. Winter prices are expected
to be another $1 to $2 lower. Spring 2001 should see strong seasonal
recovery, with prices once again moving back to the higher $40s
Costs of production are likely headed
back toward the $35 to $37 per live hundredweight range for average
cost farrow-to-finish operations. Prices are expected to average
$8 to $10 higher over the next 12 months. The days of financial
redemption have come for those who were able to hold their units
What next? Expect to see a few of
the family operations that dropped out of hog production come
back into production, but only a handful of that large group.
Pork production corporations have also been stung hard and we
can expect to see some continued consolidation and to see far
fewer return to the growth pattern of the late-1990s. Packers
have already allocated their enormous profits of 1998-99 and will
face lean margins with discouraged stockholders over the next
12 months. They will have little interest in owning more hogs.
Independent family farms are likely to continue to push for ways
to control more of the value added in processing. It is likely
that some new processing capacity will be put in place through
these groups, and this will redirect equity capital toward processing
and away from expansion of production. All of this favors a continued
period of slower than normal expansion.
A slow and controlled expansion
is just what is needed. First, sow productivity growth, which
has exceeded 3 percent per year, is more than sufficient for current
domestic and foreign demand growth. Second, the industry has to
shift away from the strategy of expansion by putting more sows
in place. This strategy led to the catastrophe of 1998-99. The
strategy of the 2000s is to expand by intensification of existing
units, or by acquisition. Finally, as producers consider expansion,
it must be done in coordination with an assurance of shackle space.
This most likely means long-term marketing arrangements. Nearly
perfect coordination of production volumes and processing volumes
is now a requirement.
Facing current challenges is always
part of running a business, but at least pork producers will have
money in their pockets to face the challenges of the next 12 months.
Issued by Chris