In spite of another year of record large U.S. pork production, hog prices will remain relatively strong in 2005 supported by: 1) very strong year-to-year increases in U.S. pork exports; 2) quarterly declines in beef production; and 3) fairly tight hog packer margins. For calendar year 2005, hog prices are expected to average slightly below 2004’s as hog prices decline seasonally in the late summer and fall months. Looking ahead to 2006, some of the factors that supported strong live hog prices in 2004 and 2005, such as growing domestic and export demand, will likely change. Furthermore, larger U.S. pork production will compete for consumer’s attention with significant increases in beef tonnage and record large chicken output. So, hog producer returns during 2006 are expected to decline significantly from 2005’s as producers’ face significantly lower barrow and gilt prices.

Keys: Exports and Domestic Demand

U.S. pork exports remained well above a year ago in the first quarter of 2005. In the first quarter, U.S. pork exports posted year-to-year increase of 20 percent, while imports of pork items declined 11 percent. That annual increase followed very strong exports in 2004. The considerable increase in pork exports, combined with a decline in pork imports and an increase in frozen pork stocks, drove U.S. per capita pork supplies below the prior year during the first quarter of 2005. For the January through March period, the consumption of pork per person in the U.S. was down 5.7 percent from 2004’s.

Several factors have been behind the recent surge in U.S. pork exports, including: 1) generally supportive U.S. dollar exchange rates; 2) BSE limitations on beef exports; and 3) Avian Influenza in the Asian protein market. For the balance of 2005 and 2006, international trade will be a key to U.S. pork and hog prices.

Yearly increases in U.S. pork exports are forecast to continue throughout 2006. But the percentage increases will likely moderate compared to gains posted in 2004 and early 2005. Pork exports for 2005 are forecast to increase about 10 percent from 2004’s, but the growth rate could slow to just two percent in 2006.

In 2004, both foreign and domestic consumer demand for pork had large annual increases. In early 2005, the story about international demand for U.S. pork remained positive, but robust growth in domestic demand was not apparent. In fact, most estimates indicated that U.S consumer demand for pork actually declined in early 2005. Smaller domestic supplies caused by a positive net international trade flows essentially masked that demand decline. So, the U.S. pork sector is somewhat vulnerable to a price decline as pork supplies increase. For the balance of 2005 and for 2006, any shortfalls in exports or domestic demand will pressure prices.

Pork Production Set to Increase

In the first quarter of 2005, U.S. commercial hog slaughter totaled 25.5 million head, about one percent below a year ago but 3.5 percent above 2003’s. Much of the yearly decline was due to smaller sow slaughter. However, barrow and gilt slaughter was slightly below 2004’s (about half a percent). Federally Inspected (FI) sow slaughter totaled 773 thousand head during the first quarter, down 5.5 percent from 2004, a decline of 45,000 head. The notable decline in sow slaughter suggests modest expansion is underway in the hog industry.

Another contributing factor to smaller hog slaughter was the significant decline in U.S. hog imports from Canada. The reduction in slaughter hog imports came on the heels of smaller feeder pig imports during late 2004, which also con- tributed to smaller first quarter slaughter. U.S. hog imports during the first quarter totaled 1.9 million head, down 15 percent from 2004. Feeder pig and slaughter hog imports should post modest year-to-year increases for the remainder of 2005.

U.S. commercial hog slaughter is forecast to be 1 to 2 percent larger than a year ago in the second quarter and up about one percent from 2004’s for the balance of 2005. For the year, commercial slaughter is projected to post a slight increase from 2004’s. However, a key factor impacting commercial hog slaughter during the remainder of 2005 will be sow slaughter relative to prior years.

FI hog carcass weights in the first quarter averaged 202 pounds compared to 200 pounds a year ago. The average FI barrow and gilt weight was 199 pounds, 3 pounds heavier than in 2004 and 2003. Despite heavier weights, commercial pork production was only slightly above 2004’s. For the first quarter, commercial pork production totaled 5.14 billion pounds compared to 5.13 billion pounds a year ago. However, compared to the prior five-year average, January through March pork production was up 6 percent (299 thousand pounds). Commercial pork production is forecast to be about 2 percent above 2004’s in the second quarter and then range between 1 and 2 percent above a year ago in the third and fourth quarters. For the year, U.S. commercial pork production is expected to wind up 1 to 1.5 percent above a year ago, which will be another new record. In 2006, U.S. commercial hog slaughter is expected to be about 2 percent above 2005’s due to 1) slight growth in the U.S. breeding herd; 2) continued improvement in U.S. breeding hog efficiency, and 3) increasing hog imports from Canada. Hog weights should stick to the normal yearly trend, posting another increase. Thus, pork production in 2006 is likely to exceed 21 billion pounds for the first time, which will be the fifth consecutive pork production record.

Hog Price Outlook

Hog prices posted year-to-year increases in the first quarter and set new records for the quarter. The national weighted average barrow and gilt price was $67.15 per cwt. (carcass basis) compared to $58.06 per cwt. in 2004, a 16 percent or $9.09 per cwt. increase. Wholesale prices for pork also were strong in the first quarter as the pork cutout value averaged $71.32 per cwt., $6.65 per cwt. above 2004’s. Only two primal pork cuts had an average price below a year earlier in the first quarter -- the loin (down 1.5 percent) and the belly (down 6 percent.)

Slaughter hog prices are expected to fade for the remainder of 2005 compared to a year ago, due to slightly larger supplies and increased margins for packers and retailers. In the second quarter, the national weighted average barrow and gilt price is expected to average in the high $60’s to low $70’s per cwt., near 2004’s average. Hog prices are forecast to decline seasonally in the second half of the year. Look for summer quarter prices to decline about 5 percent, followed by a 10-15 percent decline this fall, both compared to 2004., For the year, the national average hog price is projected to average fall about 1 to 2 percent below 2004’s. Declining prices in late 2005 mean that producer profitably will weaken dramatically by year-end.

For 2006, larger pork supplies, and maybe some moderation in demand (foreign and domestic) will push prices cyclically lower. In fact, preliminary forecasts call for prices to fall below 2005’s during each quarter of 2006. For the year, hog prices could easily post a year-to-year decline of 7 to 11 percent.

Source: K-State Research and Extension - June 2005