Chris Hurt Extension Economist Purdue University

Chris Hurt made the comments as he reviewed the impact of low grain prices on the livestock industry.

"Last spring, high grain prices were telling end users they needed to 'hit the brakes' on usage," said Hurt. "Now low grain prices are telling end-users to 'stomp on the accelerator.' What is the reaction time to move from slow-down to speed-up? The answer, of course, depends on the sector."

Live cattle weights have moved up from about 1,230 pounds per head in March to 1,265 pounds in the past few weeks. Today, cattle are being marketed 4 percent heavier than one year ago. The broiler industry can also respond quickly, and is expected to increase production by 3 to 4 percent in 2005.

"Traditionally, cheap corn has meant an expansion of the breeding herd in the fall, after harvest is complete," said Hurt. "That is likely this year as well, but not just due to the dramatic drop in corn and soybean meal prices, but also to the extraordinary demand for pork that is stimulating high hog prices as well."

In the just-released September Hogs and Pigs report, the USDA indicated that producers are already expanding. The breeding herd has increased by 1 percent, and farrowing intentions for this fall and winter are up 1 percent as well.

"In past years, the herd expansion was often led by the major corn-producing states," Hurt noted. "However, with changes in location of production and with an industrialized production sector, that is less true this time.

"While Iowa producers reported a 3 percent expansion of their breeding herds, North Carolina is up 5 percent, Colorado is up 8 percent, and Texas is up 16 percent. Illinois, with very good corn and soybean crops, has had a 2 percent reduction in their breeding herd. Minnesota, with below-average crops, also reports a 2 percent reduction."

Other midwestern states with reductions, Hurt added, are Nebraska, down 4 percent, and Wisconsin, down 17 percent. Indiana's breeding herd was reported as unchanged.

Pork supplies will be somewhat higher in 2005 than previously expected. That is not as important as the strength of demand, he said.

"Price forecasts are highly dependent on whether demand will hold into 2005," said Hurt. "As an example of the impact of demand, pork supplies in September have been about 6 percent higher compared to September 2003, but lean carcass prices are one-third higher, and live prices are nearly $15 per hundredweight higher."

What is driving the demand? Hurt said pork exports are up about 26 percent for the year, while pork imports are down nearly 8 percent. This is partially related to the near-elimination of beef exports due to BSE in the United States.

"Secondly, consumers have turned to high-protein diets in record numbers this year which has enhanced demand," he said. "Finally, it appears that retailers have heavily featured pork as a lower-priced alternative to record-high beef prices, which are expected to average near $4.10 per retail pound this year compared to pork's $2.75."

Pork producers have shown an initial response to the reversal in grain prices, but there is more to come. While feedlot managers are already adding much more weight to cattle, hog weights have not yet responded. The reason is hog prices are very high and pork producers don't believe these prices can last.

"They are selling hogs as soon as they are market ready," said Hurt. "The extreme immediate need for hogs to be sold sooner rather than later is reflected in the sharply inverted lean hog futures market. Hog weights will increase markedly when the demand forces that are creating these inverses go away.

"Secondly, more expansion should be expected because feed prices are going to be lower than was anticipated around Sept. 1 when the USDA surveyed pork producers. Third, profits this fall will be huge as costs fall into the $36 to $38 per live hundredweight range. Some of these retained earnings will go back into additional expansion."

Hurt said the hog price outlook is difficult to call. Pork supplies will be nearly unchanged this fall before rising by 3 percent in the winter and spring. By next summer supplies could be up by 4 percent, and finish 2005 with a robust 5 to 8 percent increase in the final quarter. Expectations are for prices to average in the very high $40s this fall, near $50 in the winter, and low $50s next spring and summer.

"The growing breeding herd expansion this winter should begin the downward spiral of hog prices in late summer of 2005," he said. "Price weakness may extend from the fall of 2005 through 2006."


Source: FarmDoc - 28th September 2004