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Feed costs dampen high hog prices

Feed costs dampen high hog prices

• Live hog prices in 2011 are expected to exceed $60 per live hundredweight, or more than $80 on a lean basis. • Record high hog prices would seem to suggest great profit prospects for pork producers in 2011. Of course that’s not the case as feed costs aim toward a break-even year with costs estimated to be slightly over $60 as well.

Hog and pork prices are expected to launch to record highs in 2011, due to a combination of high demand, high feed costs, and a smaller herd.  

“Foreign buyers are expected to elevate pork exports by 10 percent,” said Chris Hurt, a Purdue University Extension economist. “Pork exports are expected to represent a record 21 percent of domestic production. The combination of modestly lower production and higher exports means that the available supply per person in the United States will drop by nearly 3 percent in 2011. This will be the foundation for record retail pork prices as there will be less pork available at a time when U.S. consumers’ economic conditions are improving.”

Live hog prices in 2011 are expected to exceed $60 per live hundredweight, or more than $80 on a lean basis. “The stimulus will come from smaller per capita U.S. supplies, from much stronger demand driven by recovering U.S. and world economies, and by the inflationary policy of the U.S. Federal Reserve,” Hurt said.

How high can hog prices go in 2011? “Historically $90 lean prices, or about $67 live, were the top of futures markets,” Hurt said.

Some current futures prices now exceed $90 for the spring and summer delivery contracts and raise the possibility of them reaching $100, or $75 live.

“Some may argue that there is no historic precedence for prices that high,” Hurt said. “But, there’s no historic base for costs of production this high as well. So, a new era of high costs probably means there will eventually be a new era of record high hog and pork prices.”

Current forecasts are for hog prices to average more than $60 live for 2011. The previous record annual high was about $55.50 in 1982. By quarter, those prices are expected to average in the high-$50s in the first quarter, move toward the mid-$60s for the second and third quarters, and average in the mid-$50s in the final quarter.

“Record high hog prices would seem to suggest great profit prospects for pork producers in 2011,” Hurt said. “Of course that’s not the case as feed costs aim toward a break-even year with costs estimated to be slightly over $60 as well.”

Hog prices are expected to rise sharply in 2011 from the current low-$50s and move into the hig-$50s by late February and March. At this point, the industry will be back to near break-even prices, Hurt said. “Prices are expected to march toward the high-$60s in late May and June. The spring and summer quarters are expected to provide profitable production before sliding back to break-evens in the mid-$50s for the last quarter of the year.”

Industry has been downsizing

Hurt said that the pork industry has been downsizing in response to high feed prices and will drop modestly in 2011. In December of 2007, the U.S. breeding herd stood at 6.233 million head. Today the herd is at 5.778 million head or a 7 percent reduction.

“Pork consumers will finally be feeling the pain of high feed prices in the record retail prices they will face in 2011,” Hurt said.

The USDA December Hogs and Pigs report indicated that producers reduced the size of the breeding herd last year by 72,000 head, or about 1percent. The 2010 reduction was focused in North Carolina which had a reduction of 90,000 head. Farrowing intentions were down 1 percent for this winter and down two percent for this coming spring. This means some additional herd liquidation will be likely this winter, Hurt said.

Hurt suggests that the Federal Reserve policy of quantitative easing (QE2) also be considered as a stimulator of commodity prices. “Since the Fed announced their policy in late August 2010, commodity prices have moved up, but meats have lagged in those increases,” he said.

As an example, Hurt said the April 2011 CRB commodity index futures have risen about 26 percent while the April 2011 live cattle futures have only increased 10 percent and the May 2011 lean hogs have risen 14 percent. In contrast May 2011 corn futures are up 37 percent and May 2011 soybean meal has been up 27 percent.

“While each commodity has its own supply-and-demand situation, this may be an indicator that the full bullish impact of QE2 is yet to come to the meat complex,” he said.

Corn prices and yield will also play a role. “The U.S. average price of corn in 2011 may be $5.75 per bushel, compared to $4.78 for calendar year 2008. High-protein soybean meal is estimated at $363 compared to $331 in 2008. The total estimated costs for 2011 are $60.50 per live hundredweight compared with $54 in 2008,” Hurt said.

He added that farrow-to-finish operations had profits of about $12 per head in 2010. However, this came after estimated losses of $17 and $24 per head in 2008 and 2009. In addition, the industry is currently operating at losses estimated at $22 per head in the final quarter of 2010 and an estimated $11 of loss in the first quarter of 2011.

“Better corn yields in 2011 would help moderate feed costs, but those better yields are still far off with a lot of weather to worry about in both the Southern and Northern Hemispheres over the next nine months,” Hurt said. “The most optimistic prospects for hog producers are that they continue to trim the breeding herd in the first half of 2011 and have high corn yields next summer. This would provide robust profits for 2012. If yields are not high in 2011, then losses could return for 2012.”

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