Two types of inflation can drive the overall price level higher. Cost-push inflation occurs when production costs rise or supplies fall. Either will boost prices as long as demand remains the same. "Too many dollars chasing too few goods" drives demand-pull inflation.

Demand-pull inflation tends to benefit farmers, whereas cost-push inflation tends to hurt them. Some sectors, automobile manufacturers for example, can more easily pass added costs on to consumers. Demand elasticities make doing so in agriculture more difficult. Fortunately, cost-push inflation in commodities is usually temporary.

Cost-push inflation would have left many pork producers in the red last year without government payments. Many still were. Cash receipts were down over 4% compared to 2019. Hog prices averaged more than 8% lower for the year.

Producers paid more, earned less

Pork producers use numerous inputs and services. The all production items index for agriculture compiled by USDA's National Agricultural Statistics Service was down 0.7% in 2020 compared to 2019. But that doesn't tell the whole story for pork producers.

The overall feed index rose 0.7%, but that was a combination of a 3.8% slump in feed grains, 1.9% dip in supplements, 2.6% rise in complete feeds and 4% higher concentrates. Hogs consume a lot of complete feeds and concentrates. Plus COVID-19 related disruptions delayed marketings. That upped per head feed costs. More importantly, it rapidly eroded profits as the cost for the next pound of gain climbs at an increasing rate as hogs reach, and exceed, optimal market weight.

The labor wage rate index was up 1.5% in 2020. Gains for farmworkers were higher. According to USDA's Farm Labor survey, the national hired labor wage rate averaged $15.49 per hour in 2020, up 3.9% from 2019. Farm managers made $25.57 per hour, a 3.7% hike from 2019. Nationally, animal workers made $14.35 per hour, up 4.4% from 2019. In the Illinois, Indiana and Ohio region, animal workers averaged $14.57 per hour. In Iowa and Missouri, animal workers made $15.20 per hour.

Super demand-pull bolsters earnings

Demand-pull and cost-push factors have combined to lift hog prices. By late March, many cash prices topped $90 per cwt. Futures prices pushed through the century mark for the first time since 2014. Hog cash receipts are forecasted to be the highest since 2014.

Retail pork prices rose 4.8% in 2020 based on USDA Economic Research Service calculations using data from the Bureau of Labor Statistics and USDA's Agricultural Marketing Service. The February 2021 retail pork price was $4.15 per pound, up 7.5% from February 2020 and up 0.8% from January 2021. This is the fifth-highest price in the data series. June 2020 holds the record price at $4.25 per pound.

Measuring demand is tricky. When prices rise but volume drops, the higher price may be simply a response to lower supply. But rising prices on higher supply are a sure sign of rising demand.

The 2020 retail pork price index value advanced from 2019, as higher prices offset a very slight dip in annual per capita consumption. Last year's per capita pork consumption was the second highest in almost two decades at 51.9 pounds per person (retail weight), and prices were the highest ever. The January demand index was higher than one year earlier. The demand outlook for 2021 is optimistic, with retail pork demand remaining strong and expectations the food service rebound will accelerate.

Surging first half 2020 exports to China pushed 2020 U.S. pork export volume record high, shattering the 2019 record. Pork export value also ran record high. China was not the only success story in 2020. Maintaining record exports to diverse world pork markets would make 2021 a big win.

Hog inventories slip

The Quarterly Hogs and Pigs report released by USDA's National Agricultural Statistics Service on March 25 shows smaller inventories of market hogs and breeding animals. So, despite stronger hog prices, are producers really this cautious about expanding production? Only time will tell.

Biology prevents hog producers from rapidly responding to price changes — either higher or lower. Pork consumed today came from decisions producers made roughly 10 months ago during the throes of the coronavirus pandemic last spring. Back then, lean hog futures pointed to spring 2021 hog prices in the mid-$60s. Plus, cash prices hit 17-year lows.

Trade chatter indicates the industry is dealing with more cases of the porcine reproductive and respiratory syndrome and the porcine epidemic diarrhea virus this year compared to last year, including a virulent strain of PRRS.

The 10.94 average pigs saved per litter in December 2020 to February 2021 compares to 11 a year earlier. This was the first December-February year-over-year decline since 2013-14, but continues the declines reported for the previous two quarters. Productivity improvements could be on the horizon. The December litter rate was down 1.4% year-over-year and January was down 0.5%, but February 2021's 11.11 pigs saved per litter was 0.4% above February 2020 levels.

Risk vs. reward drives expansion

The recent price and production environment of more variability in inputs and outputs may have altered the risk–reward relationship as some producers consider expansion. If one assumes most producers are averse to risk and uncertainty, for a given level of expected profit, they would logically invest less.

Farrowing intentions reflect caution on expansion. For the March-May  quarter, producers indicated 2.5% lower year-over-year farrowing intentions. This is a decline of 53,000 sows, or 1.7%, from the first-intention estimate made in December.

First intentions for June to August indicate that producers intend to farrow 4.2% fewer sows and gilts than in the same quarter last year. This is over 3 percentage points smaller, or almost 110,000 sows fewer than the average of pre-report expectations.

Bear in mind that, as the name implies, these are intentions or educated guesses. June-August farrowing numbers have been extremely large, including in 2020. So comparing to a large number last year will alter interpretation.

Finally, only one time since 2010 has the final June-August sows farrowing number been lower than the first intention estimate. That was in 2013. On average over that period, the final June-August sows farrowing number has been over 60,000 sows, or 2.1% more than the first intentions’ estimate.

Production capacity is one important factor that will help dictate the trajectory of future hog inventories. Market hog inventories reached all-time highs on Sept. 1, 2019. At that time, the breeding herd was the largest in 20 years. Today, U.S. farms have over 3.5 million fewer market hogs and 216,000 fewer breeding animals compared to September 2019.

Demand will ultimately dictate how much and how rapidly producers adjust inventories. However, contracts — both production and marketing — and high fixed costs of operating facilities are just two of multiple factors that will help drive short- to medium-term inventories.

Schulz is an Iowa State University Extension livestock economist.