SEPTEMBER 27, 2004
LOW GRAIN PRICES-THE HOG INDUSTRY RESPONDS
Last spring, high grain prices were telling
end users they needed to "hit the brakes" on usage.
Now, low grain prices are telling end-users to "stomp
on the accelerator." What is the reaction time to move
from slow-down to speed-up? The answer, of course, depends
on the sector.
Live cattle weights have moved up from about 1,230 pounds
per head in March, to 1,265 pounds in the past few weeks.
Today, cattle are being marketed 4 percent heavier than one
year ago. The broiler industry can also respond quickly, and
is expected to increase production by 3 to 4 percent in 2005.
What about the hog sector? Traditionally, cheap corn has
meant an expansion of the breeding herd in the fall, after
harvest is complete. That is likely this year as well, but
not just due to the dramatic drop in corn and soybean meal
prices, but also to the extraordinary demand for pork that
is stimulating high hog prices as well.
In the just released September Hogs and Pigs report, the
USDA indicated that producers are already expanding. The breeding
herd has increased by 1 percent and farrowing intentions for
this fall and winter are up 1 percent as well. In past years,
the herd expansion was often led by the major corn producing
states. However, with changes in location of production and
with an industrialized production sector, that is less true
this time. While Iowa producers reported a 3 percent expansion
of their breeding herds, North Carolina is up 5 percent, Colorado
is up 8 percent, and Texas is up 16 percent. Illinois, with
very good corn and soybean crops, has had a 2 percent reduction
in their breeding herd. Minnesota, with below average crops,
also reports a 2 percent reduction. Other Midwestern states
with reductions are Nebraska (down 4 percent) and Wisconsin
(down 17 percent). Indiana's breeding herd was reported as
Pork supplies will be somewhat higher in 2005 than previously
expected. So what? The real issue is the strength of demand.
Price forecasts are highly dependent on whether demand will
hold into 2005. As an example of the impact of demand, pork
supplies in September have been about 6 percent higher compared
to September 2003, but lean carcass prices are one-third higher,
and live prices are nearly $15 per hundredweight higher.
What are the sources of demand strength? Pork exports are
up about 26 percent for the year, while pork imports are down
nearly 8 percent. This is partially related to the near elimination
of beef exports due to BSE-USA. Secondly, consumers have turned
to high-protein diets in record numbers this year which has
enhanced demand. Finally, it appears that retailers have heavily
featured pork as a lower-priced alternative to record high
beef prices, which are expected to average near $4.10 per
retail pound this year compared to pork's $2.75.
Pork producers have shown an initial response to the reversal
in grain prices, but there is more to come. While feedlot
managers are already adding much more weight to cattle, hog
weights have not yet responded. The reason is hog prices are
very high and pork producers don't believe these prices can
last. They are selling hogs as soon as they are market ready.
The extreme immediate need for hogs to be sold sooner rather
than later is reflected in the sharply inverted lean hog futures
market. Hog weights will increase markedly when the demand
forces that are creating these inverses go away. Secondly,
more expansion should be expected because feed prices are
going to be lower than was anticipated around September 1
when the USDA surveyed pork producers. Third, profits this
fall will be huge as costs fall into the $36 to $38 per live
hundredweight range. Some of these retained earnings will
go back into additional expansion.
The hog price outlook is a difficult call. Pork supplies
will be nearly unchanged this fall before rising by 3 percent
in the winter and spring. By next summer supplies could be
up by 4 percent, and finish 2005 with a robust 5 to 8 percent
increase in the final quarter. Expectations are for prices
to average in the very high $40s this fall, near $50 in the
winter, and low $50s next spring and summer. The growing breeding
herd expansion this winter should begin the downward spiral
of hog prices in late summer of 2005. Price weakness may extend
from the fall of 2005 through 2006.
Hog producers will do their part in expanding usage of this
fall's large crops. However, that help will not show up with
much force until next spring and summer and will not get to
full force for another year.
Issued by Chris Hurt