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Hog producers remain cautious even with strong demand

Even with strong demand, pork producers are likely to see a slight decline in profits. With unanswered questions about profitability, hog producers may not expand for a while.

Hog producers have remained cautious about expanding their breeding herds despite the industry's return to profitability – a wise decision considering there is still much economic uncertainty for them, Purdue Extension agricultural economist Chris Hurt says.

According to the December inventory report from the U.S. Department of Agriculture, the country's breeding herd grew by only 0.4 percent even though 2011 profits averaged about $15 per head. While that is far from the $27 a head that producers made in 2006, producers lost money over the next few years as feed costs skyrocketed.

Although the USDA has estimated that pork production will rise by 2 percent to 2.5 percent this year, Hurt said most of that increase will be attributed to there being more pigs per litter rather than herd expansion.

As the U.S. economy improves in 2012, Hurt said pork demand should remain strong. Exports are expected to comprise 22 percent of all production, meaning pork availability in the United States will increase only by about 1 percent. Smaller supplies of beef and poultry, however, will drive pork demand.

But even with the strong demand, pork producers are likely to see a slight decline in profits.

"Estimated profits above all costs are expected to drop to about $13 per head in 2012," Hurt said. "The strongest profits are expected in the second and third quarters. Some profit is expected in the final quarter of 2012 due to lower corn prices if U.S. corn and soybean yields return to near normal."

Even after the bearish January grain reports, world inventories of corn and soybeans are still tight and will keep feed costs high by historical standards. Should worldwide crop yields increase this year, Hurt said feed prices could come down, especially by fall, if the United States has a good crop. But if there are yield reductions in major production areas, feed prices could climb again.

"Given the hog and soybean meal price outlook for 2012, the break-even corn price is about $6.75 to $7 per bushel," he said. "If corn prices stay at or below this area, hog producers could cover all costs or make a profit. If they move above this area, the 2012 profit potential could shift toward a loss."

With all of the unanswered questions about profitability, Hurt said hog producers would be wise not to expand for a little while.

"These uncertainties suggest producers should continue to wait to expand until 2012 yields in the U.S. are better assured. This means expansion should not begin until mid-summer 2012."

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