The recent spike in hog prices defies sharply higher supply costs.
Purdue University Extension marketing specialist Chris Hurt describes recent high hog prices as a “miracle” amounting to an answered prayer.
“Overall, the current futures forecasts say that producer losses will not be nearly as bad for the rest of this year as had been anticipated,” says Hurt. “But the markets also agree that it will be the spring of 2009 before the industry gets back into the black.
“Earlier, I suggested it would take a 6-8% cut in the breeding herd to return to profitability. Now it appears that more modest cuts may return the industry to profitability, at least if the world keeps buying ‘high value’ U.S. pork. Thank goodness for miracles and thank goodness economists' bleak forecasts aren't always right.”
Hurt's comments were in reaction to recent changes in the hog market. In mid-March, eastern cornbelt hog prices were $35/cwt. live basis. In mid-May, they were $58/cwt. live.
“The huge financial losses have slowed as hog prices have recovered much closer to costs of production,” he relates. “What an amazing turnaround in such a short period of time. Just how surprising is this reversal of fortune?
“The average seasonal price increase from early April to early June over the past five years was $11/cwt. This year, the seasonal increase has been $23/cwt. so far, more than double the normal increase. Next, consider this remarkable price increase is occurring with pork production up about 10%, almost defying basic economics.”
Since supply costs are sharply higher, demand is the most likely answer for the price surge, and export demand is the best probable source, says Hurt.
“Unfortunately, trade data are only available through March of this year, but that data show a robust export period,” he says. “In the first quarter of 2008, pork exports were up 40% and imports were down 10%. The net impact was a 61% improvement in net trade volume. The bottom line was that additional trade enhancement in the first quarter accounted for nearly 5% of all production.”
Domestic demand may be another reason for some of the strength in hog prices, he adds. Pork is a cheap find, and consumers are looking for bargains as both food and fuel price hikes have cut into family budgets. In April, for example, retail beef prices averaged $4.17/lb., compared to $2.86/lb. for pork, a difference of $1.31/lb.
For the rest of this year, Hurt predicts hog prices will average $54 for the second quarter and $55 for the summer, then drop back to $53.50 for the fall.
If predictions hold true, prices in 2009 would average $57.50 in the first quarter and $64 in the second quarter, returning hogs to profitability.
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