Prices Look Favorable For Most of 2007-2008

Despite production growth and higher feed costs, prices look favorable for the next two years.

Glenn Grimes hopes his profitability predictions for 2007 are as wrong as those he offered at last year's World Pork Expo, when he predicted that hog profits would likely end by the close of 2006.

The University of Missouri agricultural economist was a bit off the mark in last year's outlook talk as the pork industry went on to establish a new record — 35 consecutive months of profits.

That feat was accomplished in the face of sustained growth in the industry, led by a resurgence in live hog demand that is fed in part by 15 consecutive years of growth in pork exports.

Today hog prices are back in the black after a dip in March, although Grimes foresees some losses in the fall.

The last 12 months of growth in demand is producing live hog prices that he projects will range $48-51/cwt. in the third quarter, $44-47/cwt. for the fourth quarter, and average $46-48/cwt. for the year. That compares with average prices of $46.28 for 2006 and $49.55 for 2005. Grimes offered his thoughts during an outlook forum at the 2007 World Pork Expo in Des Moines.

Projecting further out, the just-turned, 84-year-old economist has forecasted negotiated base carcass hog prices should land in the low-to-mid-$60s/cwt. through 2008, and could reach into the $70s with premiums (see Table 1).

Industry growth continues to climb, with U.S. commercial hog slaughter slated to reach 106.6 million head, 1.8% above 2006, Grimes says, based on the March Hogs and Pigs Report.

Sow slaughter and gilt retention levels are “bouncing around a little bit,” adding some uncertainty to future growth. But he says there is little doubt that sow expansion is continuing in 2007.

Favoring Industry Growth

A number of factors favor continued growth and profitability:

• There has been a significant drop in the value of the Canadian dollar. In 1996, a Canadian dollar was worth about $1.60-1.70 in the United States. This year, that conversion rate has fallen back to about $1.12 Canadian vs. U.S. levels, the lowest level since 1992. Grimes says the value of the two respective dollars may reach equality before the year is out.

  Canadian hog production is starting to reflect those currency changes. From 1995 to 2005, 74% of the increase in U.S.-Canadian pig production took place in Canada. The next 10 years should witness a different outcome due in part to the current shift in the U.S.-Canadian exchange rate, he says.

  For January-April 2007, Canadian slaughter hog imports are up 12.8%, and feeder pig imports are up 7.7%. Grimes expects those trends to continue for the rest of the year.

• Slaughter hog capacity has tightened, but still looks capable of handling supply. Much of the industry's troubles in 1998 can be traced to a lack of adequate daily slaughter capacity (381,000 head). “We are going to kill more hogs in the fourth quarter this year than we did in 1998, but slaughter capacity shouldn't be a problem unless we have more hogs than we expect, lose a plant or have some kind of an accident,” Grimes reports.

  Figure 1 on page 30 shows federally inspected daily hog slaughter capacity for 2007 has dropped to about 411,000 head, compared to around 425,000 head in 2006.

  This year's decline in slaughter capacity is due to the closing of the Bryant Foods plant in West Point, MS, and the loss of one shift at the Morrell plant in Sioux City, IA.

• The value of U.S. pork exports at $33.60/hog continues to keep hog production profitable. The U.S. Department of Agriculture projects growth of 5-6% in 2007. It would be the 16th consecutive year of record growth in pork exports.

But maintaining that growth won't be easy. As Table 2 on page 32 shows, in the first three months of 2007, pork exports grew by just 2.8%. Challenges include Mexico, where sales are off 20.3%. Grimes suggests that the high cost of corn, a staple ingredient in the Mexican diet, is probably mainly to blame.

Japan continues its growth as the top importer of U.S. pork, with South Korea anticipated as the next major growth market (see sidebar on page 32).

Data just out from the U.S. Meat Export Federation paints a mixed picture. January-April pork exports are off 3% and for April alone are down 16%. The positive news is that pork value is up 8% from the same four months in 2006.

Overall, the United States exports 15% of production, imports 5% of production and therefore is a 10% net pork exporter.

Not Favoring Industry Growth

The cost structure of hog production is approximately $7-9/cwt. higher than a year ago, and the challenge the industry faces in the next 3-4 years is how to make that adjustment, Grimes says.

“The livestock industry has got to cut corn use with growth in ethanol demand. The poultry industry cut back some earlier, but the pork industry is still growing and we see no cuts for the rest of the year in hogs,” he says.

As a result of rising corn costs, the University of Missouri economist predicts the hog industry will shrink out of necessity.

It won't be the smaller producers who feel the pinch the most, he says. Those producing less than 50,000 head/year and raising 75% of their corn needs will have the luxury of making a profit on hogs, corn, or both.

Those producers may decide that life is easier just raising grain and not hogs. But that doesn't mean hog production will necessarily drop. If their barns are fairly new, and are of some size, they have value and probably won't go out of production, Grimes explains.

Corn Price Volatility

The ethanol frenzy is going to produce a lot of volatility in corn prices, according to Robert Wisner, professor of economics, Iowa State University.

There will also be a lot of challenges in transporting, drying and handling 16-17% more corn in the estimated 90-million-acre 2007 corn crop.

Corn futures to December place corn prices in the $3.75 to $4/bu. range, he says. And Wisner says corn futures all the way to 2010 are suggesting corn prices will be in that $4 category.

Pushing corn prices is a growing demand for ethanol and a building boom of plants to produce the alternative fuel from corn.

In Iowa alone, there are 30 corn processing plants, including those producing ethanol, representing 53% of Iowa's corn crop last year.

There will be 71 plants in Iowa if all the ethanol plants planned are built. The total capacity would represent 2.9 million bu. of corn, and 142% of Iowa's 2006 corn crop, says Wisner.

In the future, more land may be added or switched to corn production to meet ethanol needs and still provide livestock feed.

But only half of the 7 million acres in the Conservation Reserve Program has potential for crop rotations that include corn production, he says.

Higher Corn Yields Predicted

Weather patterns projected throughout summer appear to favor higher corn yields for the 2007 crop, says Elwynn Taylor, Iowa State University professor and climatologist.

“The most likely (50-50 chance) U.S. corn yield for 2007 is 154 bu./acre, as estimated according to conditions as of June 1,” he says. “The chance of a record-high yield (above 163 bu./acre) is 30%, and the chance of drought (below 133 bu./acre) is 20%.”

Reports indicate that the late May corn crop exceeds conditions of the last few years with above-average subsoil moisture in much of the Corn Belt and reduced chance of widespread drought.

Improved genetics and management have resulted in consistent improvement in corn yields, which averaged 150 bu./acre for the 2006 crop, Taylor says.

Weather is obviously the most uncontrollable risk. Weather data indicates that widespread drought occurs every 19 years in the Corn Belt. The last major drought in the Corn Belt was in 1988, suggesting that 2007 would be the next year of major drought.

However, weather patterns indicate that will probably not be the case during this growing season, Taylor observes.

In fact, growing-degree days (GDD) measured at Des Moines, IA, exceeded the norm during May, similar to conditions throughout most of the Corn Belt. Above normal GDD in May and June, followed by below normal GDD in July and August, often results in record-high yields, Taylor says.

Wisner projected a modestly lower U.S. average yield of 150.5 bu./acre, based on the following three factors:

• Substantially later plantings than in the last three years;

• A large increase in low-yielding regions; and

• A corn yield decrease for corn following corn.

At his most likely yield, Wisner forecasts downside risk in harvest-time December corn futures to around $3.25/bu. He adds that corn prices are likely to be quite volatile until after pollination.

Export Growth May Hinge on New FTAs

With 2007 possibly turning out to be the year that breaks the record of growth in pork exports, several free trade agreements (FTAs) being explored could prove to be pivotal in starting another round of growth, says Glenn Grimes, professor emeritus and agricultural economist at the University of Missouri.

The National Pork Producers Council (NPPC) has urged Congress to support FTAs with South Korea, Columbia, Peru and Panama, which could eliminate current tariffs and barriers to trade in those countries.

In letters to Congress, NPPC explained that pork exports generated 82,500 jobs in the U.S. pork industry alone.

Overall, the U.S. pork industry supports an estimated 550,000 domestic jobs generating more than $97.4 million annually in U.S. economic activity and contributing $34.5 billion to the U.S. gross national product.

Pork exports raise the prices producers receive for their hogs. The FTAs with South Korea, Columbia, Peru and Panama will raise those prices by $10, $1.63, $0.83 and $0.20/head, respectively.

“Pork exports have contributed greatly to the profitability of U.S. pork producers in recent years,” says NPPC President Jill Appell, a pork producer from Altona, IL. “NPPC urges Congress to support these trade agreements and thereby improve the financial livelihood of pork producers throughout the nation.”