November 20, 2000
HOG EXPANSION ATTITUDES HAVE
"More pork is on the way."
That was the call after the September Hogs and Pigs report indicated
that farrowings would be up 1 percent this fall and 3 percent
this winter. However since the September 1 survey of pork producers
around the country, markets have become less encouraging. In August
the corn crop was pegged at nearly 10.4 billion bushels, with
a soybean crop approaching 3 billion bushels. These huge crops
were going to create the "mother" of all logistic problems
and new crop basis bids were at sub-basement levels. Central Illinois
cash corn bids in August were $1.45 per bushel with hi-pro meal
at $150 per ton, and this was before the harvest pressure began.
Meanwhile, hog prices were rocking
along at $42 to $43, with some talking about the potential for
a near record high hog-corn ratio by the fall harvest. The huge
crop had to go somewhere, and hogs appeared to be a reasonable
direction. Given these market signals, it is not surprising that
hog producers felt some desire to expand.
Now let's fast forward to today.
The monster corn crop was a possibility in early August, but the
heat, late season dryness, and lodging problems took care of 315
million bushels of the potential such that the 2000 crop would
even lose its status as the largest crop ever. The 3 billion bushel
soybean crop vanished also, being trimmed by 212 million bushels
itself. As a consequence, the storage shortness was never as severe
as anticipated, and corn basis levels and futures both recovered.
Bids of $1.45 a bushel gave way to $1.90 per bushel and higher.
Soybean meal prices rose from $150 per ton in August to $175 on
the realization of the smaller crop.
What do these higher corn and meal
prices mean to the costs of raising hogs? My estimates are that
they raised the anticipated costs by about $3.33 per live hundredweight.
But there is more to the story. Hog prices also weakened more
than many had anticipated during the late summer. Dropping from
the low $40 in August, hog prices reached their fall lows in the
low $30s in early November. While the fall quarter will still
likely average $37-$38 per hundredweight, the higher feed costs
will make the final quarter of 2000 a near breakeven period.
The profit outlook brightens only
marginally into the winter. Higher feed, fuel, and interest costs
now all will contribute to higher costs and thus even with slightly
higher hog prices there will be near breakeven returns for average
costs producers. The ray of hope remains for next spring and early
summer when higher hog prices are expected to boost hog prices
back into the profit column for a few months before the impacts
of rising production hit the market late next summer. The profit
outlook changed in a substantial way this fall and producers will
likely respond with a smaller expansion than had previously been
anticipated. Unfortunately there may be only small impacts on
the size of farrowings this winter. Those were largely being locked
in when the September survey was taken. But the size of the expansion
"follow through" that was expected next spring and summer
is where most of the impact could occur. In fact it was this continuation
of expansion that was the most worrisome for building excess supplies
in the final quarter of 2001 and early 2002 that had the ability
to break the backs of producers once again.
As we look ahead to the December
report which will be released on December 28th, it remains likely
that the breeding herd will creep marginally above year-earlier
levels at unchanged to 1 percent higher. As mentioned earlier,
winter farrowings will still likely be up 2 percent to 3 percent,
and spring farrowing intentions may be up in the same range instead
of up 4 percent to 5 percent as previously anticipated. What this
all means is that hog margins will be tighter in the coming year
than had been anticipated, but that the loss period in late 2001
and 2002 may not be as difficult as was thought back in August.
Three additional thoughts are in
order. First it seems increasingly clear that hog margins are
going to be narrow in the future. A continuation of the hog cycle
means there will be periods of both positive and negative margins,
but the average margin is likely to be small, and the ability
to earn that thin positive margin is dependent upon being a highly
Second, the total number of sows
in the country is sufficient to provide the demand growth in the
next few years based upon productivity gains. In essence, no new
sows need to be added to the national sow base.
Finally, the eastern corn belt suffered
a disproportionate reduction in their breeding herds after the
1998-99 hog depression. Now it appears there will be little opportunity
for the region's producers to strengthen their financial positions,
or to rebuild and regain their historic importance in national
Issued by Chris