The wheels of expansion seem to be grinding inevitably forward. University of Missouri agricultural economist emeritus Glenn Grimes warns unless producers put on the brakes, the hog industry may drive itself into long-term depression.
A structure study by the University of Missouri and Iowa State University shows growth plans for every size hog producer from those marketing 1,000-2,000 hogs annually to those selling 500,000 head or more.
"In a way, we are a victim of our own success," observes Grimes. "The profitability of hogs has been so good, it's one of the reasons that we are attracting additional capital to the industry, increasing the competition and reducing the return per hog."
Projected Growth On average, growth plans for all size producers surveyed in the study for 1997-2000 is estimated at 37%, says Grimes. The biggest expansion plans of 110% during that period came from the 50,000-500,000-head marketed group. The group with the smallest expansion plans, 1,000-2,000-head marketed annually, only projects 10% growth in the next three years, points out Grimes.
The 50,000-head-plus group, which represented 36% of marketings in 1997, has grown from just 7% of marketings in 1988, says Grimes citing the 10-year review. There are 145 firms in that category, up from about 66 three years ago, making it the fastest-growing segment of the hog industry, says Grimes.
In contrast, the category of under 1,000-head marketed per year went from 32% of slaughter hogs sold in 1988 to 5% in '97.
Preliminary survey data shows just 18 producer-companies are raising 23-24% of the nation's hogs, notes Grimes.
In fact, he says, those large firms expand year in, year out, regardless of price, and are poised for more growth. "The probabilities are very high that a significant portion of the growth is already in place as the sows are in place for marketings through May 1999 now," states Grimes.
This is the first time since Grimes started plotting the survey data more than a decade ago that all size producers are showing potential growth at the same time.
He says he hopes his warning of impending over production will scare off enough producers from expansion so that prices can recover to a profitable level.
"We are hoping the information from this study will reduce these growth plans. However, the odds appear overwhelming for pork production to equal or exceed 1998 levels in both 1999 and 2000," observes Grimes.
Domestic hog slaughter reached 90 million (2 million head came from imports) in 1997. For 1998, Grimes projects 100 million head of hogs will be slaughtered in the U.S. That figure could reach 125-130 million head in the next couple of years if the rate of expansion planned is carried out.
Falling Prices Ahead Slaughter is running more than 10% ahead of last year as of mid-June. Grimes expects an increase in consumer demand due to population growth and continued growth in pork exports will swallow part of those increasing numbers. But most of the pressure will fall on market prices.
Based on that projection, Grimes suggests: "Make plans based on hog prices being in the $30s during much of the time, with some possibilities for some $20s for 1998, 1999 and 2000 - and pray for a miracle."
Those kinds of prices will block producer intentions from actually achieving the 37% overall growth in the industry from 1997 to 2000, stresses Grimes. A more likely scenario, he says, is that production will level off at '98 levels of around 100 million head of hogs slaughtered for the next few years. Average live hog price for '98 will be about $36-$38/cwt., he projects.
In 1998, live prices have been in the $30 range for much of the year, climbing back into the low to mid-$40s more recently. Prices are expected to stay in the $40s through the summer. Grimes observes the industry may have already seen the high price for the year.
Don't look to reported prices to find out what pork producers are actually receiving for their hogs, he explains. Since 1990, Grimes has analyzed the five-market average live hog price reported for barrows and gilts and compared it to the actual price received based on National Pork Board calculations.
"Notice, we have gone from about $2 below/cwt. to last year (when) producers received about 75 cents/cwt. above the five-market average," Grimes says. For the first four months of this year, producers are receiving $2.50/cwt. above that reported live price."
There are two reasons for the better prices. The five-market average price is for average 49-50% yielding hogs. Producers checking off their hogs are getting a better return because they have better-than-average cutting hogs. Also, packer contracts are providing more value than selling hogs on the open market, he reports.
Even with a contract and/or premium, hog prices will be mostly unprofitable for several years to come, notes Grimes. Eighty percent of producers surveyed said they would need $40/cwt. live price or better to stay in business until the year 2002, reports Grimes during a presentation at World Pork Expo in Des Moines, IA. And only 10% to 20% of producers reported they could breakeven if prices average less than $37/cwt. to the year 2002.
If that price average should come true, and Grimes says it is a possibility, there will be a major exodus of some fairly large producers.
"What we see as a high probability is a lot of concentration in the next three years," says Grimes. Units won't close. They will simply be bought out by other concerns. Grimes speculates it is likely that the 18 largest producer companies are most likely to snap up those that pull out.
But he emphasizes he doesn't see consolidation of the hog industry akin to what took place in the broiler industry a number of years back. Independent producers will survive as long as they play it tough and have access to a market. "We don't see the hog industry going the route of the broiler industry until independent producers lose their market."
But industry evolution will involve "a massive weeding out" of the very small producers marketing 1,000 head a year, says Grimes.
Crops El Ni"n"o isn't over, but it is definitely diminishing, says Elwyn Taylor, with Iowa State University (ISU). El Ni"n"o usually means good Midwest corn yields and his prediction is for an average of 130 bu./acre.
With feed prices the lowest in years, ISU's Bob Wisner advises locking in corn and soybean meal supplies now.
But there may be wisdom in waiting, also. Last year's corn crop of 9.3 billion bushels may be surpassed by this year's projected 10.259 billion crop. If that projection holds, corn prices could dip to $2.10/bu. cash market, $2.45 futures price.
For soybeans, Wisner forecasts domestic production of 2.7 million bushels. The seasonal average price will be $6.45/bu. for soybeans and $180-185/ton for soybean meal, says Wisner.