CME: Outlook for US Producers Under Speculation

US - According to CME's Daily Livestock Report for 4 June 2009, there is a lot of speculation as to what will be the outlook for US pork producers for the remainder of this year and in 2010.
calendar icon 5 June 2009
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What everybody agrees on is that things can no longer continue in this fashion. Pork producers have been losing money consistently since 2007 and with corn and soybean prices moving higher, their losses will persist in the second half of this year. Dr. John Lawrence at Iowa State has been calculating pork producer profitability for a long time and the chart to the left graphically shows the implied profitability for a farrow to finish operation. Individual results obviously vary as more efficient operations reap the benefits of better productivity and lower overall costs.

Also, the situation is slightly different for those that focus simply on farrowing or finishing, and the number of specialized operations has been growing. Overall, farrowing operations appear to be doing much better than those simply finishing hogs. The former have benefited from the shift among some packers towards US born feeder pigs. Rising costs and slumping hog values clearly have hit finishing operations who are caught with animals that were bought at relatively high prices as feeders and now have to be sold at a significant loss.

The overall calculations provide a useful benchmark as to where the industry is at this point in time. The April numbers from Dr. Lawrence numbers show that total farrow-to-finish gains/losses were estimated at a negative ($18.45) per head and based on the preliminary feed and hog prices for May we calculate that in early June they were likely around ($30) per head. US pork producers have been losing money in 18 of the last 20 months and the latest action in the CME hog futures almost assures that they will continue to lose money for the remainder of 2009.

Unless we have an unexpected bumper corn crop and more planted acres than expected, current feed values would imply live hog breakevens in the mid 50s, and possibly higher (around $75 on a carcass weight basis). On Thursday afternoon October lean hog carcass futures closed at $61.225 while December was at $64.175. In the past, negative margins have led to declines in production. How much the industry needs to cut back this time around will be an interesting guessing game in the coming months

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