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Pork Industry Heads for Higher Production

by 5m Editor
23 July 2007, at 12:00am

By Chris Hurt, Extension Economist Purdue University. In his latest Outlook report, Chris Hurt says, higher pork production will result in somewhat lower hog prices.

Thank goodness corn prices have now moved lower since pork producers have decided to stay on the course of moderate expansion. Higher pork production will result in somewhat lower hog prices, but anticipated costs of production have dropped sufficiently to offset these lower hog prices.

Price levels for corn and soybean meal remain one of the large uncertainties for the next 12 months. The size of the corn crop will come into better focus over the next several weeks and by mid to late-August for soybeans.

The Numbers

The nation's breeding herd continues a modest increase. In the June report, the USDA reported that the breeding herd had expanded by almost 1 percent. This is now the 10th quarterly report showing that the breeding herd has been larger (Figure 1). There is no one geographic region that is experiencing more expansion. The slow increase is in keeping with the growth in demand for pork in the domestic and the export market.

The number of pigs per litter continues to set new records (Table 1). March-May litters averaged 9.15 pigs per litter, a new record. Reflecting a few more sows and higher weaning rates, the market herd number was estimated to be up by 1.8 percent. Producers say they intend to farrow 2.5 percent more sows this summer and then .4 percent more in the September to November quarter.

Supplies and Prices

Some upward revisions in pig crops and larger than expected farrowing intentions for the summer will contribute to somewhat greater pork production than had been anticipated. In addition, corn prices have dropped as of this writing, which if continued, means weights will be higher. This all means that pork supplies will move up somewhat more than had been forecast prior to the report.

Pork production is expected to rise by 3.2 percent over the next four quarters compared to the average of the last four quarters. Some of this increase will be absorbed by higher exports; however, per capita pork availability in the domestic market is still expected to rise by nearly 2 percent in the coming 12 months.

Competitive meat supplies will play a role in prices of hogs and pork in the coming 12 months as well. Broiler production is expected to rise by 2.5 percent and turkey production by over 1 percent. However, beef production is expected to be down a bit. If corn prices do stay as low as they are in early July, it is likely that production of other species will increase even more. Production of broilers and turkeys can respond quickly to lower feed prices. Cattle on-feed numbers can also increase, along with higher market weights for all species.

Prices of live hogs are expected to average about $48.50 per live hundredweight over the next 12 months based on 51 percent to 52 percent lean carcasses. Prices for the third quarter are expected to average in the $50 to $54 range. Last quarter prices are expected to drop to $43 to $47. Winter prices may improve some to $45 to $49, with second quarter 2008 prices back up to $48 to $50.

Estimated Returns Near Breakeven

Near breakeven is the outlook for farrow-to-finish returns over the next 12 months. Breakeven is not so bad because it means all costs are covered, including family labor and full depreciation. Even though the hog price outlook has weakened somewhat with the latest inventory report, lower corn price prospects have compensated. Over the next 12 months, we are estimating a slight profit of about $.50 per hundredweight. However, that will mostly come this summer with estimated profits near $5.00 per hundredweight, followed by losses this fall and winter of about $1 to $2, and near breakeven next spring. Corn and soybean meal prices could still be dynamic over the next few weeks until the size of this summer's crops become clearer. Each $1 change in corn prices impact national hog production costs roughly $5 per live hundredweight.

The estimated corn breakeven prices over the next year given current futures price estimates for soybean meal are $4.18 per bushel this summer, followed by $2.85 in the fourth quarter, and $3.06 and $3.77 for the first two quarters of 2008, respectively.

Even with wide swings in anticipated feed prices, pork producers have maintained a steady hand on the reins. They have continued a modest expansion to supply a growing world demand for their pork products in the face of greater financial risks and uncertainties to themselves.

Implication for the Industry

The industry has just experienced large shifts in the price prospects of primary feed ingredients. Yet, the industry has stayed on the same course. This is a reflection of the greater stability of the production sector today, and to the commitment pork producers have to their product. While profits are expected to be negative this fall and winter, we cannot foresee a period of losses that would result in a liquidation of the breeding herd.
The odds seem to favor continued wide swings in feed ingredient prices. This means that price risk management on feed purchasing takes on added significance. It is likely that feed prices may add nearly as much too financial risks in the future as hog price uncertainty.

To view the July 2007 tables, please click here (PDF Format)

July 2007