Adjustments in the U.S. and Canadian breeding herds, and the staying power of U.S. pork exports and domestic pork demand, will be pivotal if U.S. producers are to eke out a profit this year.
What gives? There were supposed to be decent hog profits in 2003 and 2004.
Instead, hog prices last year only climbed into the black for brief periods and averaged about $1/cwt. in the red; 2004 receipts are expected to hover near the cost of production for much of the year.
Ron Plain, University of Missouri Extension agricultural economist, explained during a presentation at the Iowa Pork Congress that the U.S. pork industry absorbed several profit-robbing production milestones in 2003:
Commercial pork production hit 19.912 billion lb., breaking the old record of 2002 by 1.26%;
Commercial hog slaughter at 100.78 million head was the third-largest ever behind 1999 and 1998; and
Commercial pork production per hog slaughtered set a new record for the 7th consecutive year. The average dressed weight of barrows and gilts was 195 lb., 2 lb. over 2002. The average live weight for all hogs slaughtered under federal inspection, including sows, was 267 lb., 2 lb. heavier than 2002.
Fourth quarter 2003 federally inspected slaughter ended up 3.4% above 2002 and nearly 1% above the fourth quarter of 1998, pointed out Steve Meyer, president of Paragon Economics and consultant to the National Pork Board.
Remarkably, fourth quarter 2003 terminal market hog prices averaged $34.15/cwt., compared to only $19.49/cwt. in 1998, said Plain.
“Hog markets managed to avoid a repeat of the price disaster of the fall of 1998 because packers had more slaughter capacity this time around,” Plain observed.
Meyer said pork demand also contributed to holding prices up in the face of large supplies.
And exports were on track to record a 13th consecutive record year in 2003, he says.
Plain tracked the hog cycle from 1970 to 2003. Big 20% swings in production used to be normal, whereas now, a 5% swing is huge (Figures 1, 2).
The modern structure of the pork industry makes it more difficult to shut off growth, “and we still have a lot of operations that want to grow,” he explained.
Plain stressed, “We are stabilizing production, making it easier to forecast the number of hogs we are going to kill, but it's not one bit easier to forecast price.” Productivity is growing 4% a year, he said.
Changes in the North American breeding herd reflect the difficulty of reducing numbers, said Chris Hurt, Purdue University agricultural economist. U.S. sow numbers have declined by 268,000, or 4.4%, since the start of 2000.
In contrast, Canada's sow herd has experienced a 20% growth since 2000, and has increased its hog exports to the U.S. by 3.4 million head since 1999, nearly replacing U.S. cutbacks, he pointed out.
Canada far outstrips U.S. producers in pigs/breeding animal/year, with more than 19 vs. about 16.5 for the U.S., said Plain.
Canadian hog production was 12% of what U.S. producers produced in ‘76; it grew to 29% in ‘02, stated Plain.
The size of the U.S. breeding herd was pegged at 6.0 million head on Dec. 1, 2003, down 0.8% from a year earlier. In the top 10 hog states, Oklahoma had a 9% increase, followed by a 3% jump in Minnesota and Ohio and a 1% hike in Iowa and Nebraska, he reported.
The eastern Corn Belt continues to lose breeding herds, declining by nearly 10% since 2000, while Oklahoma, Texas and Kansas added 85,000 sows in that period.
Canada's hog exports to the U.S. already were on the rise in 2003 when BSE struck in Canada on May 20, said Hurt. That actually dampened pork demand in Canada, as consumers supported cattle producers by eating more beef, forcing more hog exports to the U.S. Canada's hog shipments to the U.S. last year are estimated at over seven million head. The BSE occurrence added 1.5% to U.S. slaughter and depressed U.S. prices by about $2/cwt., Plain said.
Complicating matters, the pork industry is entering a new era on price discovery, he said. Historically, there was a negative 2:1 relationship. For every 1% more hogs on the market, prices dropped 2%. For every 1% fewer hogs on the market, prices rose 2%.
This pricing relationship applied until late 1994. “Since then, it has been less predictable and the ratio is more like 5:1,” said Plain. If you put 1% more hogs on the market, expect 5% lower prices, and if you trim hogs marketed by 1%, expect 5% higher prices.
Where and when you sell your hogs adds to price variability, he said. Hogs sold on the spot market, which declined to about 13% of production in 2003, pay the least return, while contract sales arrangements pay the most.
Hog prices also vary by region of the country. Last year, the national average base price on a carcass weight basis was $51.82/cwt. The eastern Corn Belt was 28¢ under this average; the western Corn Belt paid the most with 13¢ above the average, said Plain.
Time of day also influences price paid for hogs not sold on a contract basis, he noted. The Agriculture Department publishes a morning report for all hogs purchased by 9:30 a.m., an afternoon report for all hogs purchased by 1:30 p.m. and a prior day report for all hogs purchased the day before. Last year, prices tended to go higher as the day wore on. Average carcass weight basis returns were $51.39 for hogs sold by 9:30 a.m., $51.69 for all hogs bought by 1:30 p.m. and $51.82 for all hogs bought the previous day.
“The point is, if you are selling on the spot market, you don't want to negotiate a price early in the day as packers are raising their bids as the day goes on,” related Plain.
Live hog prices started 2004 running $7-8/cwt. higher than a year ago, despite 4% more slaughter and record-high weights, offered Meyer. He doesn't believe pork demand and exports can continue to prop up these higher levels of production, even if pork sales overseas displace beef due to the first case of BSE in the U.S.
Meyer predicted live hog prices averaging $40/cwt. for the year. Positive wild cards include the very real possibility of a major cutback in the Canadian breeding herds and reduced Canadian hog exports to the U.S. due to increased value of the Canadian dollar (+18% in value in 2003).
Higher U.S. feed costs could lower slaughter weights. Some retailers have been griping about the size of pork cuts, said Meyer, speaking at the National Hog Farmer/Iowa Pork Congress breakfast. The National Pork Board is conducting research to find out if cut size is influencing consumer purchases. Meyer doubted that it is because there are very few cuts that are purchased in the same size as they come off the pig, pork chops being one of the exceptions.
Plain predicted production and prices to average:
Hurt was slightly more optimistic about 2004 prices. He projected yearly slaughter to drop 0.6% to 99.8 million head and prices to increase by $3/cwt. to average $42/cwt. for the year based on 51-52% carcass lean. The highest prices, near $44/cwt., will occur in the second quarter. He cited the potential increase in pork exports from the avian flu outbreaks, Smithfield's 5% sow herd cutback and a stronger Canadian dollar as contributing factors.