 
March 28, 2005
HOG PROFITS TO CONTINUE
Hog producers in the U.S. say they have
made no movement toward expansion yet, and will actually farrow
a few less sows this summer. With little threat of expanding
pork supplies, pork demand factors continue to favor highly
profitable prices through the summer. The lack of expanded
farrowings this spring and summer should also provide incentives
for fall and winter futures prices to increase from pre-report
levels.
The breeding herd as of March 1, 2005 was reported as unchanged
from year-ago levels, while the market herd was up about 1
percent. Farrowing intentions for this spring are the same
as last year and producers say they will reduce summer farrowings
by nearly 1 percent. If they follow through, this means that
pork supplies will increase by only 1 to 2 percent for the
rest of 2005. Larger supplies will be as the result of more
pigs per litter and heavier marketing weights rather than
increases in farrowings.
Two states were distinct in increasing their breeding herds.
Iowa increased by 40,000 animals, or 4 percent, and Illinois
increased by 20,000 animals, or 5 percent. The only other
major state to increase the breeding herd was Oklahoma, which
was up 10,000 animals, or 3 percent. States decreasing their
breeding herds were led by Texas, Pennsylvania, and Kansas
each with a 15,000 head reduction, and North Carolina, Minnesota,
and Indiana each with a 10,000 head reduction.
Why have hog producers not responded to the very good profitability
over the past year? One hypothesis is that there has not yet
been sufficient time. Remember that the hog outlook did not
turn favorable until May 2004 as a result of much higher hog
prices and declining corn and meal prices. Even in the summer
of 2004, many producers did not believe their good fortunes
could continue as the pork industry has had limited experiences
with demand-led bullish markets. Secondly, most realized that
two of the important demand factors could turn sour at any
time. These were the increased pork exports as a result of
BSE restricted beef trade and the narrow marketing margins
at the packer and the retail levels. Finally, U.S. producers
have not been in an expansion mood since the terrible financial
bust of 1998 and 1999. Since that time, U.S. producers have
reduced the breeding herd by 1 million head, or 14 percent,
as the growth in sow numbers was primarily in Canada. Whatever
the reasons for the lack of expansion, the U.S. industry likely
needs to evaluate the market's need for more pork in the next
five years.
Since pork supplies do not appear to be a threat to hog prices
for the rest of the year, pork demand will again be the primary
feature of discussion for 2005. In 2004 pork demand led markets
to average about $52.50 per live hundredweight based upon
51% to 52% lean hog carcasses. This was about $13 per live
hundredweight higher than in 2003. Improved pork trade accounted
for about $3 of the $13 higher prices. The other $10 was a
result of improved retail pork demand, which accounted for
about $5 higher prices, and narrow marketing margins, which
were also about $5.
Hog prices are expected to provide strong profits this spring
and summer. Second quarter prices on a liveweight basis are
expected to average in the low-to-mid $50s. Peak prices would
be expected in May and June. Some price moderation is anticipated
later in the summer, especially by September. Prices for the
third quarter are expected to average in the low $50s. Prices
are expected to be in the mid-to-higher $40s in the fall and
in the mid-$40s for the winter of 2006. Given current expected
feed prices, these price levels will provide extremely profitable
margins over the next six months and good margins for the
following six months.
Issued by Chris Hurt
Extension Economist
Purdue University
  |
