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Serving: IA

Rising Feed Costs Squeeze Hog Profits

Cutting herd size and growing demand are two ways to maintain profits.

Canada is doing what U.S. pork producers probably need to do. That is reduce the size of their swine breeding herd.

On October 1, Canada's breeding herd was 1.7% smaller than 12 months earlier. Canada's market herd was down 5.7% from the same date in 2005. The bigger reduction in the market herd than breeding herd is due, in part, to Canada sending more feeder pigs to the U.S.

Canada's third quarter pig crop was 3.4% smaller than the same period in 2005. Canadian producers plan to farrow 3% less sows in October-December than 12 months earlier.

Possible adjustments to rising costs. "Corn futures prices suggest high odds that corn prices will run $3 per bushel or higher for the foreseeable future," says Glenn Grimes, University of Missouri economist. "Rising production costs mean producers will need to reduce the size of the hog herd or we will need demand growth to keep hog producers profitable."

In the last five years the cost of producing hogs in Iowa has been slightly less than $40 per cwt. for the average-cost-producer. "In the next five years, production costs will likely exceed $45 per cwt.," predicts Grimes.

Over the most recent five years U.S. hog prices for 51% to 52% lean hogs averaged about $44.50 per cwt. "Unless producers trim size of the hog herd or we grow demand for pork, the average-cost-producer is likely to lose money in the next five years.

Unfortunately, hog demand is softening. Live hog demand was down 0.8% in 2005 from 2004. In the first nine months of 2006 demand for live hogs lost another 0.8% from 2005.

"Strong competition from other meats means we'll need very strong exports to get live hog demand growth," says Grimes. "We expect pork exports to grow. But the growth rate will likely be slower than the torrid pace of the last three years."

The bottom line. Odds are relatively high that demand for live hogs will grow little compared to the last three years. Some possibility exists that demand will erode further from the high level of 2004.

"Under those expectations, reducing the size of the hog herd is the most likely action producers can take to maintain profitability in the hog industry," says Grimes.

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