With farrowing predictions up 1-3%, total production up 2-3% and slaughter up about 5%, prospects look ominous for 2008.
U.S. packers slaughtered a new-record 109 million head of hogs in 2007, 4.4 million and 4.2% more than the previous year.
USDA predicts commercial hog slaughter at nearly 115 million head in 2008, which will set another record.
Ominous signs were evident in wrapping up this past year, says Ron Plain, University of Missouri agricultural economist, speaking at the Minnesota Pork Congress. All 13 of the largest hog slaughter weeks on record (2.3 million head and up) were set from October 2007 through January 2008.
“We are killing an astounding number of hogs. We are getting run over with hogs and the prices are going down,” observes Plain.
Eleven of the 13 weeks in the fourth quarter of 2007 were above the old slaughter records, only interrupted by the holidays of Thanksgiving and Christmas, when federally inspected slaughter plants are shuttered.
The trend continued into January 2008, and Plain expected record-setting slaughter numbers to continue through the end of February.
Hog Price Predictions
As a result of record-setting production levels, Plain forecasts Iowa-Minnesota hog prices for 2008 to average in the mid to upper $50s, carcass weight, (Table 1) and in the low to mid-$40s on a live weight basis (Table 2).
That's a drop from under $62/cwt., carcass weight, for negotiated hog prices in 2007.
“On a live weight basis, producers are going to need something well above $50/cwt. to break even, based on an average price for corn of $5/bu., so there will probably be plenty of red ink,” notes Plain.
Hog prices reached red ink in October 2007. Pork producers who opted to forward-price hogs on the Chicago Mercantile Exchange (CME) from late 2007 into early 2008 captured roughly $10/cwt. more than they could on the spot market.
“The hog futures market has been very optimistic about hog prices all through this (period of increased output), and they continue to be,” remarks Plain.
Figure 1 shows 2008 Iowa-Minnesota hog carcass price forecasts from Plain vs. the CME. The returns from the CME are considerably higher, even $15/cwt. higher for the fourth quarter of 2008.
Plain says that frankly, that level of optimism about hog prices during this time of significant overproduction is difficult to comprehend.
“But before you decide you don't want to be in the hog business anymore, take a look at hedging 2008 production on the CME,” he urges. “They are offering you an opportunity to probably break even, even with corn prices close to $5.”
That could smooth things out for producers who are facing the double whammy of high feed costs and low hog prices.
Feed prices are being driven higher by ethanol production that could hold the average price of corn for 2008 at an estimated $5/bu. and soybeans to $12.50/bu., Plain projects. Ethanol gobbled up just 6% of corn production at the start of this decade, but will consume four times that amount for 2007-08 (Figure 2). Ethanol production has virtually doubled in the past year or so.
Distiller's dried grains with solubles (DDGS), a by-product of ethanol production, can replace up to about 15% of corn in a hog diet. But the price of DDGS has been following the price of corn upward, making it a less attractive option. Plain says in the long term, the price of DDGS should level off and drop below the price of corn beyond 2008.
An expanding share of that growth in pork production has been shipped overseas. In 2007, the United States recorded its 16th-consecutive year of increased pork sales, says Plain. The USDA has indicated that when all the sales are tallied, the United States could very well pass up the 27-member country European Union to become the world's largest pork exporter for 2007.
“We exported 3.2 lb. of pork for every pound that we imported last year, putting a value on pork and pork by-product exports at $28.89 for every market hog sold,” he says.
“Those exports went a long way toward helping the pork industry enjoy its longest string of profits on record — 35 months consecutively in 2004-2006,” Plain comments.
Commercial hog production, however, defied explanation during that time because it actually increased each of those profitable years from 2004-2006 and into 2007. “Pork exports went up incredibly fast, while imports were going down, so when you take U.S. production, plus imports, minus exports, we find that the amount of pork available on the U.S. market was actually shrinking year after year, even though we were raising more hogs (Figure 3),” says Plain.
Together with declining U.S. per-capita pork consumption and more exports, less available pork at retail meant higher prices for pork at retail, and the longest period of profitability for hog farmers in the last 40 years.
Plain points out that it usually takes five months of red ink (October 2007 to February 2008) before producers reduce breeding plans. “March is my estimate of the soonest that breedings will drop below year-ago levels, and that means it will be January 2009 before slaughter numbers will be below those of the previous year,” says Plain.
There's no doubt 2008 will be tough.
And Plain says don't forget that many producers made a lot of money in the last three years — and they should be able to stick it out if they choose to.
“Long-term, there is a place and a career in hog production,” he stresses.
|*actual price - prior day purchased|
|*actual carcass price × 76%|