The livestock and poultry sectors experienced a stressful year in 2002 as a confluence of weather, disease and trade disturbances affected markets. Drought gripped much of the nation, diminishing forage and increasing grain costs.

Hog producers expanded farrowings by about 3 percent in the first half of 2002 but as hog prices dropped in mid 2002 and grain prices rose to 5 year highs, producers began liquidating sows and reduced farrowings below year earlier levels. As a result, inventories which were 3 percent above 2001 on June 1 finished the year 1 percent below 2001.

As the sector moves into 2003, prospects for livestock and poultry are somewhat improved. Although grain prices are higher than a year ago, a return to normal weather may insure adequate forage supplies for the reduced inventory. Tighter inventories should help support livestock and poultry prices during the year, setting the stage for an expansion in inventories in the next years.

Hog inventories may begin increasing next year. Trade prospects are improved. Although several countries have instituted barriers which may limit growth in exports to those countries, it is hoped that they will bring a degree of normalcy to trade patterns.

However, a number of uncertainties overhang any forecast in 2003. The economy remains sluggish and any economic disruption could limit meat demand. Disease and food safety concerns are increasing and could derail any expansion if foreign or domestic consumers shy away from meat consumption.

Hog Producers Cautious

Faced with higher grain prices and falling hog prices, producers appear to have cut short a planned expansion and lowered inventories in 2002.

The December 1 hog inventory indicated that there were 1 percent fewer hogs and pigs on farms compared to December 1, 2001. In early 2002 producers were poised to increase production after two years of prices in the mid $40 per cwt range,.

Farrowings in the first half of 2002 averaged 3 percent higher and concerns were being expressed that slaughter numbers in the fourth quarter might begin to stress slaughter capacity. However, grain prices began to increase last summer and hog prices had begun to move lower in the second quarter. By late summer producer returns were being squeezed and, with concerns of substantially lower prices in the fourth quarter, producers scaled back their production plans. Sow slaughter jumped sharply and producers reduced farrowings to 2 percent below the previous year. By December 1, the breeding herd inventory was 3 percent below 2001.

Although pork production in 2002 increased almost 3 percent to a record 19.67 billion pounds, lower beginning inventories and a much more cautious view of hog markets is likely to lead to lower production in 2003. Producers have indicated that they expect to farrow 2 percent fewer sows in the first half of the year. Although hog prices are forecast to rise during the year, it is unlikely that returns will be sufficient to trigger any inventory expansion before 2004. First quarter production is expected to be about 1 percent above 2002 as the last of the second half 2002 inventory expansion reaches market weight.

In subsequent quarters, production is forecast to fall below last year despite a continued trend towards higher carcass weights. For all 2003, production is forecast to be 19.46 billion pounds, about 1 percent below last year.

Hog prices in 2002 averaged $34.92 per cwt, below break even for much of the sector. Little relief is expected in the first quarter of 2003 as prices are expected to average $34-36, about $5 per cwt below first quarter 2002. However, as supplies of pork tighten, hog prices are forecast to increase to $38-42 in the spring and summer quarters.

Additional price support will likely come from reduced supplies of other meat, particularly beef. However, even in the face of high wholesale beef prices in the past several months, pork prices have increased very little. Retail prices in the first quarter are expected to be below last year, reflecting relatively large supplies of pork but then strengthen later in the year.

In the fourth quarter, both live hog and retail prices are expected to decline from their seasonal peaks but remain above 2002. For the year, live hog prices will average $37-$39 per cwt and retail prices will average in the upper $2.60's per pound range.

Pork exports rose about 4 percent in 2002 to an estimated 1.62 billion pounds carcass weight. Exports to Japan and Korea expanded while trade with Mexico and Russia was weaker. Despite lower U.S. production, some export growth is expected during 2003 as income growth in a number of key countries stimulates demand. However, in the case of Mexico, the forecast for U.S. exports is somewhat clouded. Mexico has instituted an anti-dumping investigation against U.S. pork. Although the investigation phase is still underway, preliminary findings may be announced as early as mid-July.

The assessment of duties may have a depressing impact on pork exports. U.S. pork imports climbed about 15 percent as shipments from Canada reflected higher Canadian production. Higher pork prices in 2003 will help attract larger imports although the rate of growth will likely be tempered by slower growth in Canadian production as drought in 2001-2002 raised grain prices. Imports in 2003 are forecast to increase 2 percent to about 1.08 billion pounds.

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Source: USDA Agricultural Outlook Forum 2003 - February 2003