July 7, 2003
PORK PRODUCERS MAY LEARN
A FORGOTTEN WORD: "PROFITS"
can look forward to the next 18 months with some optimism as costs are expected
to drop and hog prices remain at least high enough to cover all expenses. This
is great news for many producers needing to improve their relationship with their
lenders after about 14 months of operating losses.
improvement will result from lower feed costs and higher hog prices coming from
reductions in pork production as a result of breeding herd cut-backs. Costs are
expected to drop about $2 per live hundredweight by this fall due to lower corn
and soybean meal prices. Pork supplies are expected to be down an estimated 2
to 3 percent for the remainder of this year.
The breeding herd continues to
decline as producers respond to discouraging prices and lack of profits over the
past 14 months. The breeding herd on June 1 was estimated by USDA to be down to
5.9 million animals, a reduction of over 4 percent from the same date last year.
This is the fourth quarterly report indicating that the breeding herd is declining.
Further declines are expected through all of 2003 so that pork supplies will continue
to decline through much of 2004.
states have reduced the size of the breeding herds. The decline was led by Missouri,
with 11 percent fewer animals in the breeding herd, but closely followed by Iowa
and Ohio with an 8 percent reduction. Illinois' herd was down 7 percent, Indiana
down 6 percent, and Nebraska was down 5 percent. These six states accounted for
a reduction of 225,000 animals in the breeding herd, with the national total down
269,000. The breeding herd increased by 9 percent in Oklahoma, 5 percent in Texas,
4 percent in South Dakota, and 2 percent in Minnesota. Nationally, producers indicated
they will farrow 2 percent fewer sows this summer and 1 percent fewer this fall.
Pork supplies should continue to moderate throughout
2003 and into 2004. Pork production is expected to be down 2 percent in the summer
and nearly 3 percent in the fall. Pork production during the first-half of 2004
is expected to be down 1 to 2 percent. Hog prices are also likely to be supported
by an improving U.S. and world economy over the coming year and by the decline
of the U.S. dollar relative to the Canadian dollar. Prices for 51 to 52 percent
lean animals on a live weight basis are expected to average in the low to mid-$40s
this summer, before dropping to the higher $30s for a fall quarter average. Prices
are anticipated to average near $40 for the winter and in the low-to-mid $40s
for the spring of 2004.
While a period of large
profits cannot be forecast from the current level of herd liquidation, observations
from past hog cycles suggest that the ultimate reduction in the herd may be larger
and that prices and profits will be greater than is now in view. In cycles observed
since 1980, profits reached at least $10 per live hundredweight in the most profitable
quarters. The current "best estimate" of the high price period would
be the spring and summer of 2004. To achieve $10 or greater per live hundredweight
margins would require hog prices in the higher $40s and above. While June 2004
futures are currently reflecting live prices several dollars lower than this,
hog producers will likely see profitable hedging opportunities over the next 14
months. Those farrow-to-finish operations considering exit from the industry should
focus on completing farrowings in the summer of 2004 and selling the last of the
market hogs by the end of 2004.