Weekly Outlook: Hog Profits

URBANA - Modest profits are expected for pork producers through the first half of 2007, but those hopes are threatened by the potential for higher corn prices, said a Purdue University Extension marketing specialist.
calendar icon 11 July 2006
clock icon 4 minute read
"It may be time to fill every inch of space with corn as the last of the relatively cheap corn may be available this summer and fall," said Chris Hurt. "With ending stocks of over two billion bushels, basis levels should be weak and futures premiums for next spring and summer are large. This means that ownership of cash corn from now through harvest will likely pay handsome dividends for hog producers."

Hurt's comments came as he reviewed the USDA's latest Hogs and Pigs report. It showed that producers continue to avoid expansion in the face of strong profits over the past two years.

The breeding herd on June 1 was up 1 percent from the inventory of a year ago. Indiana led with a 20,000-head increase and South Dakota producers added 15,000 head to the breeding herd. States that increased by 10,000 head included Colorado, Iowa, Missouri, and Nebraska.

Farrowing intentions for this summer were unchanged from last year and fall farrowing intentions were up a modest 1 percent.

"The number of pigs per litter continues to set new records and averaged 9.06 pigs for the first half of 2006," said Hurt. "The number of market hogs was fractionally higher, but generally less than expected prior to the report.

"The number of pigs that will come to market primarily in July and August was unchanged from last year and the fall supply should be about 1 percent higher than last fall."

Given the stability of inventory numbers, pork supplies are expected to be up only 1 percent this summer and 2 percent in the fall. For the first half of 2007, pork production is expected to be up in a range of 1 to 3 percent. Hog prices for the first half of 2006 averaged only $45, compared to $52 in the first half of 2005.

"This represented a 13 percent drop with pork supplies up only 1 percent," said Hurt. "These very large changes in price with only small changes in supply have been characteristic of the market since the late 1990s.

"Hog prices provided a surprising upward surge this spring as prices moved from the high $30s in early April to the higher $50s by mid-June, supported by smaller-than-expected slaughter counts."

Third-quarter prices are expected to average in the $46 to $48 range, he added. A transition from high prices in the high $50s in early July to the mid-$40s by the end of September is expected. For the fall and winter quarters, prices are expected to average about $44. Some improvement is anticipated into the spring of 2007, perhaps pushing prices to an average near $46.

"Hog prices prospects for the coming 12 months have 'perked up' a bit, but anticipated costs are moving up also," Hurt said. "Given current corn and meal prices, estimated costs will move from the high $30s this past spring to about $43 to $44 by spring of 2007 as a result of higher corn prices.

"The industry is expected to experience profit margins of about $7 per live hundredweight this summer, but only $1 to $3 per hundredweight from the fall through the spring of 2007. The industry has been profitable since the spring of 2004, so the current quarter will be the 10th consecutive quarter of profits. This is the longest run of profits since the mid-1980s."

Hurt noted that since there is little change in hog numbers, pork supplies do not appear to be a major threat to profits at this time.

"The two most important threats are the potential for rising corn prices and the potential loss of pork exports with reopening of the Asian beef market," he said. "The larger of these two is clearly corn price uncertainty.

"Current forecasts for above-normal temperatures and below-normal precipitation for the mid-July pollination period are of concern. In addition, rising corn utilization for ethanol means a close-to-normal crop is needed to avoid some price rationing in coming months."

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