Producers can expect record costs: ’08 could be worst year ever for pork

WEST LAFAYETTE, Ind. – This year may be the worst financial year for pork producers since the 1998, said a Purdue University Extension marketing specialist.
“All you have to say to a pork producer is ‘1998’ and the most jovial fellow will turn red with rage, or drop his shoulders in a feeling of helplessness.
“Unfortunately, those emotions may be relived as 2008 may replace 1998 as the worst financial year for pork producers in modern history,” said Chris Hurt.
Feed costs. “The No. 1 culprit is high feed costs and the second is too many hogs. The current unrelenting climb of corn and soybean meal prices may drive 2008 costs to the highest annual level ever,” Hurt said.
In addition, there continues to be more slaughter hogs than accounted for in USDA inventory reports, with no signs of moderation.
Hurt addressed the problem of “unexplained hogs.”
Forecast slaughter at the beginning of the fourth quarter of 2007 was about 4.5 percent higher. Actual slaughter was up almost 9 percent. Where did the extra hogs come from?
“USDA increased last spring’s farrowings somewhat, but there were still nearly 3 percent unexplained slaughter hogs,” said Hurt.
The great worry, he said, is that there may still be more hogs than USDA has counted in the December update. The December USDA inventory count indicated that slaughter would rise by about 4 percent for the first five months of the year.
If USDA has undercounted, slaughter could be 6 percent to 7 percent higher.
USDA indicated that the breeding herd was up by just 1 percent and that winter farrowings would rise by 2 percent and spring farrowings by 1 percent, he said.
Supply and demand. Pork supplies are expected to expand by 3 percent to 5 percent in each of the first three quarters of the year. By the final quarter, production may be about the same as the final quarter of 2007, but that was too much pork, Hurt noted.
“Annual production in 2008 will rise by about 3 percent, too much to sell at profitable prices,” he said.
Live hog prices for 2008 are forecast at $46.30, down from $47.10 in 2007. These are based on live weight prices for 51 percent to 52 percent lean carcasses.
Prices are expected to average in the very low $40s in the first quarter of the year, rise to the high $40s for the second and third quarters and finish the last quarter with mid-$40s averages.
“Average prices for 2008 are expected to be the lowest in five years,” he noted.
Record costs. While live hog prices are expected to average $46.30 for the year, costs of production are estimated at $55.60 based on futures prices for corn and soybean meal on Jan. 4, 2008, and adjusted to cash purchase levels, Hurt explained.
“These estimates suggest a loss of about $9.30 per hundredweight, or nearly $25 per head on average for the year.
“This would exceed the previous worst year in modern history, 1998, with an estimated loss of $6.78 per live hundredweight.”
Costs prospects for 2008 at $55.60 are extraordinary, he added.
The largest losses are expected in the first quarter of the year, when they could reach $36 per head, and then be around $20 per head for the rest of the year, he said.
Survival mode. How do hog producers get out of this one? Nothing is going to come easy, Hurt predicted.
“Producers may want to base their strategies on a ‘survival mode’ for 2008,” he said.
“If they can get through 2008, hog prices will likely recover in the spring or summer of 2009.
“The industry needs to work quickly on demand stimulation. Retail pork prices have continued to move upward. Retailers need to be encouraged to lower pork prices by being reassured that wholesale pork prices will remain low in coming months. Foreign buyers need to be encouraged to increase purchases at this time of low-priced wholesale cuts.”
A special effort needs to move forward with China to resolve issues that may be constraining their purchases, he suggested.
On the supply side, producers can, and will, cut weights to optimum levels. A re-examination of feed efficiency, starting with feeder adjustment, should be undertaken. Low-feed animals should be rapidly culled.
Breeding herd. Finally, the breeding herd must be cut, maybe in the range of 3 percent to 5 percent. That process is likely beginning now and will continue through the first half of the year, Hurt said.
“They say it is always darkest before the dawn, but the dawn will not be in sight until pork producers reduce production to better align with this new high-cost era,” Hurt said.