Hog producers not ready to expand

WEST LAFAYETTE, Ind. – Strong profits this spring will not necessarily encourage hog producers to expand their operations, said a Purdue University Extension marketing specialist.

“Producers had just recovered sufficient profits by March of this year to cover the losses they had sustained in late 1998 and in 1999,” said Chris Hurt. “In essence, they are just now back to the financial point that they were three years ago. Secondly, all producers knew that the United States would benefit from foot-and-mouth disease problems in Europe, but that these benefits would likely be short-term, at least for countries like Denmark that were able to remain FMD free.

“Finally, the devastation of FMD in England has been a constant reminder of what could happen on their farms if FMD were to break in the United States. Many press articles and even some U.S. scientists and officials gave low probabilities of keeping the United States FMD free.”

Hurt’s comments came as he reviewed the pork industry in which hog producers are currently experiencing profit levels that have not often been seen in recent history.

In the second quarter of 2001, returns to producers are expected to exceed $12 per live hundredweight, or $30 per head. Since 1990, there have only been two other quarters (about four percent of the time) when profits achieved this level.

“The current favorable returns are a result of three factors,” said Hurt. “The first is a low rate of expansion in the breeding herd. The most recent USDA Monthly Hogs and Pigs report says producers are not currently moving toward expansion. For the spring quarter, producers had indicated they would expand the breeding herd by somewhat less than 1 percent.

“In March, farrowings were up 1.4 percent, but April farrowings were actually down 0.3 percent from the number bred in March. In summary, there still is little movement toward expansion, which is favorable for the hog price outlook.”

Trade restriction.

While controlled expansion of the breeding herd is expected to continue, the second important factor giving rise to strong profits apparently will not. This factor is a restriction on trade of European pork due to foot-and-mouth disease.

Restrictions on European pork being shipped to most of the world helped to stimulate exports from the United States, especially to Japan. In addition, the United States buys pork from several European countries. On May 25, the United States lifted the ban on European pork imports from countries other than those that have been positive for FMD-England, Ireland, France, Greece, and the Netherlands.

Big impact?

“How big an impact will the opening of some European imports have on U.S. prices? ,” Hurt asked. “In 2000, the United States imported about 200 million pounds of pork from Europe. This represented only 1 percent of our 18.9 billion pounds of domestic production and included the following volumes: 148 million pounds from Denmark; 24 million from Poland; 11 million from the Netherlands; and nine million from Hungary.

“The current opening of imports from these countries, except for the Netherlands, means that live hog prices could drop by 75 cents to $1 per live hundredweight. This is a relatively small impact compared to the loss of exports we would have sustained when Japan opened its borders to non-FMD European countries earlier this spring.”

Low-priced feed.

The final factor that has given rise to strong profits is low-priced feed. Near the first of the year, central Illinois corn prices reached $2.10 per bushel, but have declined steadily since and are approaching $1.70 per bushel. Soybean meal reached $200 per ton in January, dropped to $150 per ton in March and has since recovered to about $170.

“Given these input prices, the cost of hog production has declined about $3 per live hundredweight since the beginning of the year,” said Hurt. “Current costs of production are estimated to be in the $35 to $39 range.”

Prices to fall.

Hurt noted that as the world returns to a somewhat more normal pork trading pattern, U.S. prices are expected to weaken into the summer and decline further as supplies increase in the fall and winter. Cash hog prices, which have reached $53 at terminals in May, will likely be nearer $50 for averages in June.

“By midsummer, prices are expected to decline into the higher $40s, and drop into the lower $40s in September,” said Hurt. “Fall prices could be near $40 for an average, but be in the higher $30s in late October and November. At this point, winter prices are expected to remain in the higher $30s, providing a modest profit.”

Futures markets peaked in mid-April and have dropped $6 to $7 per lean hundredweight since.

“The latest indication that producers are not moving toward greater expansion will likely mean that futures price levels will recover some in coming weeks,” said Hurt. “If so, producers will be able to establish hedges at profitable levels through the coming winter.”