Purdue University Extension Economist Chris Hurt says the highest hog prices on record could be here by summer.

“These may be the highest hog prices for the next several years as well, especially if corn and soybean shortages can be reduced somewhat this summer with favorable growing conditions.

“On the other hand, if 2011 turns out to be a short crop production year, then the surging feed prices will force added liquidation of the hog herd this fall,” Hurt adds.

Granted pork supplies will be somewhat larger this year, as indicated in USDA’s Hogs and Pigs report. However, demand factors are more important to hog prices now than supply. Those demand factors consist of continued strong growth in exports, continued U.S. economic recovery and inflation in commodities, he says.

The pig crop report indicates that the market herd was up about 1% from a larger-than-expected winter pig crop, meaning pork production will be up more than 1% in 2011, Hurt says. The breeding herd also rose slightly – the first time since March 2008 that it has increased. The herd has been in decline the last three years as producers adjust the herd due to high feed prices and significant financial losses.

North Carolina has experienced the largest reduction of the breeding herd during the past three years, at 40% of the national reduction. That compares to the states of Minnesota, Iowa and Missouri, which when combined only accounted for 24% of the decline.

With USDA now projecting pork exports to rise by 11% this year, and Japan likely to need more U.S. pork to deal with its nuclear disaster, less pork will be available to consumers, dropping domestic per capita supplies for 2011, he adds.

“Both hog and cattle prices have been on a missile headed upward. What can change this ascent? Anticipated inflation probably has continued to play into the strong futures prices for lean hogs and live cattle as the U.S. Federal Reserve continues an easy monetary policy through June. However, there is increasing thought the Federal Reserve may not continue with that policy after June, raising concerns whether lean hog and live cattle futures can maintain current lofty levels,” Hurt explains.

Rising retail prices of both pork and beef may also become factors that limit the upside potential of futures prices as consumers reconsider reducing purchases.

Retail pork prices should reach $3.40 a pound this year, compared to $3.11 last year, a 9% increase, he says. Retail meat prices are expected to rise sharply this summer and could encounter consumer resistance.

“Lean hog futures have some historic tendency to peak in early May, so this spring is a time for pork producers to consider larger hedging positions in lean hog futures,” he says.

Record-high hog prices are expected to average in the high $60s to low $70s in the second and third quarters on a liveweight basis. Prices are projected to be in the low $60s for the fall and winter of 2012.

“Cost of production this spring will be record high as well, averaging nearly $65/live hundredweight in the first three quarters. If hog prices move into the lower $70s as expected this spring and summer, pork producers will be able to pay above $7.50 a bushel for corn and still break even,” Hurt observes.

Corn prices remain a pivotal part of pork margins into next fall and winter.

“Everyone knows that harmful weather this growing season could send corn and soybean meal prices much higher, pushing hog producers back toward extremely large losses. For this reason, the pork breeding herd will not increase until a favorable crop is assured this fall,” he says.