December 1, 2003
WILL THE TIDE TURN FOR HOG PRODUCERS?
Agricultural commodity prices have
generally been very strong this year. Cattle prices are at record
highs. Corn, soybean, and wheat prices are sharply higher than their
past five year averages. Broiler prices are over ten percent higher
than last year's price and egg prices are up over 25 percent. Even
lamb prices are nearly $20 per hundred higher than last year. Why
have hog prices been forgotten in this period of farm price bullishness?
The answer may be very complex and related to what seems to be
a general tendency toward overall lower hog prices since about 1997.
In fact, since 1998, live hog prices have averaged only $38.56,
which is by far the lowest level for any 6 year period during the
post inflation period of the early 1970's. In contrast, the six
year average price for the years ending in 1985, 1990, and 1995
were $46.88, $48.25, and $45.43.
The obvious reason is the industrialization of the industry which
may have driven costs down. In addition, this "Wal Marting"
of the industry has collapsed profits to the thinnest of margins,
which means that only those with large volumes can generate a reasonable
annual family income. But there are other worries as well. The seeming
inelasticity of supply is one. This simply means that producers
have become very hesitant to reduce production even in the face
of apparent large losses. Another concern is that some production
companies negotiated marketing contracts that provided them with
prices substantially higher prices than market averages over these
depressed price years. NAFTA may be a culprit as well. U.S. producers
were slow to recognize that Canada would be a major hog growth area,
sending an additional 4 million hogs to the U.S. per year since
1997. This left no room for U.S. producers to gain domestic and
export market growth. And now, the era of cheap feed prices may
have drawn to a close with tight world stocks of corn and wheat,
and continuing uncertainty of how to get through this marketing
year with a limitation on U.S. soybean supplies.
Alternatively, perhaps hogs are just late getting to the bullish
price parade. The year of 2003 has had its surprises, especially
in the form of much larger Canadian hog imports after the May 20
BSE cow discovery in Canada. It now appears that the U.S. will import
one-half million more market hogs from Canada than had been expected.
There are positive signs that hogs may eventually make it to the
parade. While hog production is going to be up by about one percent
in 2003, live hog prices are going to also be up about 13 percent.
Higher production and higher prices is a positive sign that demand
may actually have improved. The primary demand enhancer is likely
the record high retail beef prices that have comparison shoppers
running to the pork section of the meat case. High retail beef prices
will continue in 2004 and 2005 and will be an enhancement to pork
demand and hog prices. Rising U.S. and world incomes should add
to pork demand for the coming year as well.
Canadian production has been surging to the U.S. in the past five
years, especially in the form of SEW pigs, which have increased
by four million head since 1997. The incentive to have sows in Canada
and ship pigs to the U.S. for finishing was enhanced by the surging
value of the U.S. dollar in the 1997 to 2002 time period. However,
the tide has turned in the past year as the U.S. dollar has dropped
about 19 percent relative to the Canadian dollar. While this will
not immediately divert the flow of SEW pigs since most are on long-term
contracts, it greatly reduces the incentive to sign new or to renew
old contracts. Finally, Canadian beef is slowly being allowed to
come into the U.S. and these volumes should expand in 2004. This
will mean that Canadian consumer will consumer more pork and export
less to the U.S. in 2004.
Overall, there are a number of fundamentals, especially on the
demand side, that may be building the case for a bullish price run
for hogs sometime next year. The final major factor, however, is
supply, and at this point there is little indication that U.S. producers
intend to cut back even in the face of losses occurring over 40
percent of the time during the 1998 to 2003 time period. At this
point it appears that pork production could rise modestly again
next year, setting new high production records. If so, only modest
improvement in hog prices can be expected, moving from a live price
of about $39 this year to around $41 next year. Critical to supply
prospects will be the information provided in the USDA December
Hogs and Pigs report to be released on December 30.
Issued by Chris Hurt