Outlook Profitable For Most of '05

Pork demand and a series of other factors have taken hog prices to new heights, and made them seemingly resistant to record meat supplies.

The meteoric rise of hog prices in 2004 and 2005 may slow later this year — but what a magical ride it has been.

In early 2004, hog prices were facing insurmountable odds similar to 2003: increased pork supplies exacerbated by rising slaughter numbers and carcass weights. Plus, sow slaughter started out the year up 4%, adding more tonnage to the market.

Then the hog market suddenly took off, rising to highly profitable levels. When feed prices plummeted later in the year, profit margins rose some weeks to levels not seen since the summer of 1990, reports John Lawrence, Iowa State University (ISU) Extension agricultural economist.

“What has really driven this market has been demand,” he observes.

For all of 2004, total meat supplies were actually down 3%, because beef production fell nearly 8%. But pork supplies were up 2.6% and slaughter climbed 2% to record levels, says Lawrence. “Those were record supplies of pork and we are anticipating slightly larger supplies in 2005, up 1-2%.”

He declares: “Pork demand has been phenomenal this past year. Although pork supplies were up, prices were also up about 30%,” defying the normal laws of supply and demand.

“Trouble is, I can predict supplies coming based on farrowing intentions, breeding herd numbers, pig crop, etc.,” he continues. “But I don't have a clue where demand comes from, when it is going to decline or when it is going to grow. I can't tell you what to expect.”

Factors Affecting Hog Prices

Lawrence says pork demand appears to be slacking off a bit. Competing meat supplies will further dampen prices. Both poultry and beef are expected to add to total supplies in '05. The anticipated opening of the U.S. market to Canadian cattle in March and expected growth in Canadian meat exports to the U.S. will cause beef prices to fall and consumers to start backing away from pork, he predicts.

As it stands, beef prices have been fairly high since late 2003. In fact, the ratio of beef prices to pork prices is the highest it has been in 17 years, making pork a pretty good value and part of what has been driving demand, Lawrence points out.

Beef stocks have also taken a hit with Japan's ban on U.S. beef, due to a single case of bovine spongiform encephalopathy. Japan is importing more U.S. pork, giving the pork industry “a huge edge.”

According to the U.S. Meat Export Federation (USMEF), U.S. pork exports to Japan in 2004 set new records with exports of nearly 345,000 tons, up 16% over 2003, plus setting a new dollar value of $978,541, up 25%.

The U.S. pork industry exported more than $2 billion worth of pork and more than 1 million tons of pork and pork variety meat products in 2004 for the first time, based on USMEF data. The $2.227 billion represents over half a billion dollars more than the value of U.S. pork exported in 2003.

U.S. pork exports in 2004 recorded the 14th consecutive record-breaking year for volume sales.

With hog and pork supplies virtually stable, any increases basically hinge on increased productivity in the U.S. breeding herd and in the number of pigs and slaughter hogs imported from Canada. In 2004, Canada shipped 5.6 million weaned and feeder pigs to the U.S., up about 13%, while live market hogs increased to almost 2.5 million head.

Short-term, regardless of the outcome of the U.S. duty case against Canada, more pigs will enter the U.S., he says. But long-term, he sees Canada continuing to add slaughter capacity and shipping the U.S. more pork products not impacted by duties.

Price Projections

Using the hog cycle as a price barometer, Lawrence projects a $50 cash hog market for 2005, with prices expected to weaken somewhat after Labor Day (See Table 1).

Hog prices could dip further in 2006, causing some herd liquidation. But, he adds, “I don't know if that is going to happen or not, because again, this market is demand-driven, not supply-driven.”