HIT PANIC BUTTON
Say it isn't so! How
can 1998 be happening again? Wasn't 1998 supposed to be a once in a lifetime
event? How can hog producers get through this one? Is this the end of
the line for the independent hog producer?
Panic attack is the
only way to describe the past two weeks in the hog market. Those producers
who survived 1998 have been determined to not have it happen again. Nearly
everyone thought that the worst of the financial crunch would not come
until this fall, providing time to move animals to market by late summer.
However, a much more aggressive liquidation of sows, advanced marketing
of market hogs, and drought which sent feed prices unacceptably higher,
have set the panic in motion.
Prices were low in
early August and conditions grew worse. Terminal hog prices started the
month in the mid-$30s and ended the month in the $15 to $18 range per
live hundredweight. However, terminal prices are not currently reflecting
base values producers are receiving at packers. The national base price
for 51%-52% lean animals on a liveweight equivalent basis ended the month
at about $27. The range of price quotes by market and type of contractual
arrangement has been extreme. On August 28, for example, Midwest hog purchase
base prices were quoted from $24 to $37 per live hundredweight, with a
weighted average of $28. The lowest prices were for hogs without contracts,
where the producer negotiates the price of each load with the packer.
The highest prices were for those in a category known as "other purchase
agreements," which is a non-formula agreement. In general, values
of formula hogs were in the $27 to $32 range on a liveweight equivalent.
Supplies of hogs
surged in July and August, increasing by about 7 percent over the same
period last year. USDA inventory estimates suggested about 2 percent more
hogs for this time period. So how can the additional 5 percent greater
supplies be explained? First, sows began to flood to market. For the two
months, sow slaughter was up about 20 percent over the slaughter during
the same period last year. Secondly, the increases in Canadian live hog
imports accounted for nearly one percent additional slaughter. These two
factors combined account for about 2 percent of the unexplained 5 percent
greater slaughter. A third factor is advanced marketings of market hogs.
By the last-half of August, producers pressed the panic button and began
selling market hogs at lighter weights. At the start of August, weights
were running nearly one percent higher than weights during the same period
last year, but by the last week of August they were down fractionally.
All these factors still do not fully account for the large number of hogs.
USDA may still have underestimated hog numbers by about 2 percent in their
June inventory.The demand problems for pork have been negative as well.
The trade restrictions on broiler exports to Russia, the slowly recovering
U.S. economy, a 5 percent decrease in pork exports with a 17 percent increase
in imports for this year, and large supplies of competitive meats have
left cold storage pork stocks currently up 40 percent.
The best news for
the industry is that sows are being liquidated fairly rapidly. Sows not
bred in August, will not have pigs in December, and pigs will not reach
market in June of 2003. The bad news is that we are still 9 months away
from seeing the impact of sow liquidation on smaller pork supplies. Heavy
sow slaughter can be expected through much of the fall. Producers will
also continue to market lighter weight pigs. In the short-run, these will
keep pressure on the already depressed markets. The USDA's September Hogs
and Pigs report, to be released on September 27, will likely show a breeding
herd not much changed from last year, with the market herd up about 3
percent. This will not be sufficient to turn prices higher. So it appears
that fall prices are set for a continuation of the current rugged period.
It appears that 51 to 52 percent lean hog prices, on a live equivalent,
will be in the $26 to $28 range. Prices may improve to $28 to $31 for
the winter and to near the mid-$30s for the spring. By summer, prices
could be back into the low $40s, with mid-to-higher $40s in late summer
and into the fall of 2003.
Cost on the other hand will be near $40. This means that losses could
average about $13 per live hundredweight, or $34 per head, this fall.
Losses would be somewhat less in the winter and only about $5 per hundredweight
in the spring. In comparison, estimated losses during the fourth quarter
of 1998 were $45 per head.
This is the end of
the line for the few truly independent producers that were left. The financial
risks of not being aligned in some way in the pork marketing chain are
just too extreme. While many families and hog corporations will not get
through this period of low prices, those who stick with it, or counter
cyclical investors who buy at the bottom, can expect handsome returns
in late 2003 and 2004.
Issued by Chris