Tighter Prospective Corn and Hay Supplies Boost Prices

U.S. corn production for 2006 was forecast at 10.9 billion bushels in the October Crop Production report, down from the September forecast of 11.1 billion bushels. Hay production was forecast at 147 million tons this year, down 2.4 percent from last year, but up from the August estimate.

Hogs/Pork:

The Quarterly Hogs and Pigs report released by USDA on September 29, 2006 showed the September 1st inventory of breeding animals to be almost 2 percent larger than at the same time last year. The additions come in response to an extended period of positive producer returns. Larger pork supplies in 2007 will most likely translate into lower hog prices next year. Prices for 51- to 52-percent live-equivalent hogs in 2007 are expected to range between $40 and $43 per hundredweight (cwt). Simulated pork producers’ returns, using USDA price forecasts in ERS’s “Estimated Returns” program, suggest that producers can expect positive returns through 2007.

Hogs and Pigs Report Shows Continued, Measured Additions to Breeding Herd

The Quarterly Hogs and Pigs report released by USDA on September 29, 2006 showed the September 1st inventory of breeding animals to be almost 2 percent larger than at the same time last year. The 1.79-percent change was the largest year-over-year increase of breeding herd numbers in more than 8 years. The addition of 19,000 breeding animals since June 1, 2006 continues a modest expansionary trend that began in the September-November quarter of last year (see figure below). The additions come in response to an extended period of positive producer returns.

Since September 1, 2005, the U.S. pork industry has added about 107,000 animals to the breeding herd. The gradual rate of expansion so far, and the modest number of additional animals, suggests that net breeding-animal additions are being made by medium- and smaller-sized operations. Large operations appear to be “expanding” via acquisition of existing operations. For example, Smithfield Foods recently announced its intention to purchase Premium Standard Farms, Inc. Once finalized, the acquisition would increase Smithfield’s breeding inventory by 50 percent. The acquisition would represent an internal expansion however, and not a net addition to the U.S. breeding herd.

Continuation of Positive Producer Returns Likely in 2007, Despite Lower Hog Prices and Higher Corn Prices

U.S. commercial pork production is expected to be 21.9 billion pounds in 2007, about 3.9 percent higher than production this year. The 2007 forecast reflects higher breeding herd numbers, farrowing intentions, and litter rates, as reported in the September 1st Quarterly Hogs and Pigs report. The production forecast also includes an increase in the number of live Canadian swine expected to be imported by U.S. finishers and packers in 2007
(http://www.fas.usda.gov/gainfiles/200609/146218886.pdf).

Larger pork supplies in 2007 will most likely translate into lower hog prices next year. Prices for 5- to 52-percent live-equivalent hogs are expected to range between $40 and $43 per cwt, more than 11 percent below prices this year. Moreover, corn prices--a key input to pork production--are expected to rise next year, due to a smaller corn crop and strong demand. Farm prices of corn next year are expected to range between $2.40 and $2.80 per bushel.
(http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1 194).

When USDA’s 2007 price expectations are used to simulate returns in the Economic Research Service’s “Estimated Returns” program for a farrow-to-finish operation located in the North Central States, the results show positive returns in each quarter of 2007. Returns estimated with the simulation program show strongest positive returns in the summer quarter (July-September) and weakest returns in the fall quarter (October-December).

Domestic and Foreign Pork Demand Remain Key Variables in 2007

Domestic and foreign demand for U.S. pork have been among the key variables driving U.S. hog producer returns in 2006, and they will likely remain as important in 2007. On the domestic side, larger pork supplies are expected to boost per capita consumption by 1.5 pounds in 2007, compared with this year. Consequently, retail prices are expected to average lower in 2007--but only slightly so. Retail pork prices will likely average in the mid-$2.70s per pound next year, down from the low-$2.80s per pound average anticipated for 2006. Despite larger expected pork supplies, 2007 retail prices are likely to be supported by relatively strong retail prices for beef and poultry, and a wholesale-to-retail price spread that is expected to remain about as wide as in 2006, due primarily to higher energy costs.

Robust Foreign Demand for U.S. Pork Expected for Balance of 2006 and for 2007

Although the third quarter tends to be the lightest of the year for pork exports, July and August 2006 shipments were lower than expected to almost all countries, especially to Mexico. Higher U.S. ham prices in the third quarter are likely part of the explanation for lower exports to Mexico. Lower exports in July prompted USDA to lower the third-quarter export forecast by 50 million pounds, to 650 million pounds. The new forecast represents a 3-percent increase over the thirdquarter of 2005.

The third (July-September) quarter typically establishes the export low for the calendar year. Lower summer exports are consistent with seasonally higher U.S. pork prices. As the figure below indicates, lower U.S. exports for July and August are consistent with the lower summer values of the monthly seasonal index. The figure suggests that U.S. pork monthly exports in the third quarter will likely average around 215 million pounds, before rebounding in the fourth quarter, when U.S. pork supplies are plentiful and prices typically at seasonal lows. Fourthquarter exports are expected to be 785 million pounds, more than 11 percent above fourth quarter 2005.

Total U.S. exports for 2006 are expected to be 2.97 billion pounds, more than 11 percent above the total for 2005. In 2007, exports are expected to be about 3.10 billion pounds, or 4 percent above expected exports this year. The lower year-overyear increase expected next year compared with this year represents a continued market adjustment to disease issues and outbreaks. Thus, exports will likely continue to support pork demand again next year, a result of the same two variables that have driven exports in the past few years: attractive U.S. pork prices from plentiful supplies, and a relatively low-valued exchange rate of the U.S. dollar, measured against other pork-exporting countries. The figure below shows the broad U.S. index for 2005 and through part of October 2006 (http://www.federalreserve.gov/ releases/H10/Summary/). The index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The lower values of the index after April 2006 suggest that U.S. pork products have a price advantage over pork priced in the currencies of competing exporting countries.

Further Information

For more information view the full Livestock, Dairy and Poultry Outlook - October 2006 (pdf)

October 2006