Profitability May Be Winding Down

Eighteen months of profitability has been therapeutic for a hog industry buffeted by low prices in recent years, but that may all come to an end in 2006.

“We are in one of the longer periods of profitability that we have enjoyed for quite some time in the hog industry. I think we have a 90% probability of getting another 6-7 months on that,” says Glenn Grimes, professor emeritus at the University of Missouri, speaking at Pork Academy, an educational seminar held the day before World Pork Expo in Des Moines.

The agricultural economist says several signs point to a downward spiral in the live hog price cycle, led by softening demand for pork.

While pork production is up less than 1%, to date, “it's pork demand that has us worried,” says Grimes.

Pork cutout values have been dropping all year. Frozen pork stocks at the end of January were 99% of year-earlier levels, compared with 126% above year-ago levels at the end of April.

Pork demand is credited for higher market prices.

“For 2004, pork prices were 52% higher than you would expect after you made the adjustment for supply,” adds Grimes. About 6% of the price increase was due to less pork imports, 70% to increased pork exports and 20% due to stronger domestic demand for pork, he says.

But food demand hinges on diet fads — and consumers are known to switch allegiances quickly, Grimes reminds.

Heavier slaughter weights are also adding to tonnage concerns. For instance, slaughter weights for the first week of June in Iowa-Minnesota markets averaged 268 lb., 3.2 lb. heavier than last year. Through May, Grimes says U.S. barrow and gilt carcass weights were 2.6 lb. heavier than during the first five months of 2004. “Heavier weights are the reason that year-to-date pork production is up even though year-to-date hog slaughter is down.”

Since March 1, hog slaughter has been up just 0.6% compared to the same period a year ago, half the 1.2% projected by the March pig inventory report. Grimes says a 14% drop in slaughter hog imports from Canada since March 1 account for much of the decline in slaughter from the March prediction.

Through early June, each week of 2005 has seen fewer imports of hogs and pigs than the same week in 2004.

While Canadian imports have declined, the U.S. breeding herd appears to be slowly expanding. Through May, sow slaughter, as a percent of the sow herd, was down 5.7% and gilt slaughter also declined slightly. It appears that the breeding herd has climbed by 1% for the June 1 inventory, he adds.

With growing reports of substantial plans for hog expansion over the next two to three years, it won't be surprising to see the breeding herd increase by 2-3% by the end of 2005, reports Grimes.

Pork Exports

Pork exports have also played a key role in propping up hog prices. That trend has continued in 2005, with first quarter exports rising 20% over a year ago, while pork imports declined 11%.

Pork exports added $13.40 to the value of hogs in 2002, $13.80/hog in 2003 and $18.60/hog in 2004.

There's a very good chance that pork exports will rise for the 15th-consecutive year in 2005, and the Agriculture Department has already projected another increase for 2006.

Price Projections

Live hog prices averaged $52.64/cwt. for the first quarter of 2005 and they're projected just above $50 for the second quarter, $45-48 for the third quarter and $40-43 for the fourth quarter.

The Livestock Marketing Information Center based in Lakewood, CO, predicts that despite another record year of pork production in 2005, hog prices will remain relatively strong. Reasons include: strong increases in U.S. pork exports, quarterly declines in beef production and fairly tight pork packer margins. The center is a cooperative project of 24 state Extension Services working with USDA.

Center officials suggest that softening domestic and export demand for pork, plus larger pork stocks competing with much larger tonnage of beef, and record levels of poultry production, will culminate in significantly lower barrow and gilt prices in 2006.

During 2006, hog slaughter is predicted 2% above 2005 due to slight growth in the U.S. breeding herd, continued improvement in breeding herd efficiency and increased hog imports from Canada, say Center analysts.

As market hog contracts have increased, reports of spot or cash-traded hogs have dropped precipitously. If this trend continues, by 2007 there won't be a spot market, warns Grimes.

One solution is to mandate price reporting of meat. The more likely choice is to enact legislation to require packers to buy a certain percentage of their hogs on the spot market.