The surprising reduction in the breeding herd inventory in the recent Hogs and Pigs report indicates pork production will drop more than anticipated. Reduced supplies will line up with much stronger demand in the U.S. economy and continued growth of pork exports.

“This means robust profits will return for producers,” says Purdue University Extension economist Chris Hurt. Profits should reach about $18/head this year, compared to an average loss of $20/head in 2008 and 2009.

The breeding herd on March 1 dropped by 4% from the inventory of a year ago, representing 232,000 fewer head.

“Most startling was the further collapse of the North Carolina herd,” Hurt says. “That herd was down 50,000 head last December and had an additional fall of 50,000 head in the last three months, for a total of 100,000-head reduction over the past year. This likely reflects the decisions of large integrators to further reduce their herds, as well as the bankruptcy and liquidation of the 30,000 sows in the Coharie operation last November.

“Given continued environmental concerns surrounding hog production in the state, this may signal a longer-term decline in hog populations there. The smaller breeding herd means farrowings will be down about 4% this spring and about 3% in the summer. Pork production is now expected to drop by about 3% for the year.”

The result is pork will cost consumers more in 2010, Hurt predicts. While pork production will be down about 3%, the amount of pork per person available to U.S. consumers will decline by about 5% due to U.S. Department of Agriculture projections that pork exports will expand by 8%, removing product from the domestic market. Rising U.S. incomes increases competition for limited pork supplies. Beef competition will be down with domestic stocks expected to be down 2% also. This should produce sharply higher retail pork prices, especially this summer and fall.

Live cash hog prices averaged about $50.50 in the first quarter for 51 to 52% lean carcasses. Prices are expected to move sharply higher over the next two months and could extend into the low $60s in late spring and summer. Quarterly averages are projected in the middle to high $50s for the second and third quarters, before falling back into the very low $50s for the fall and winter quarters.

“The outlook for lower feed costs is another important factor leading to those glorious profits,” Hurt says. “The pork industry has finally reduced the herd to a level that can support $3.50/bu. corn. Total costs of production for farrow-to-finish production in 2010 are estimated at about $47, down from $54 in 2008 and $50 in 2009. There is considerable optimism that the entire animal sector is now emerging into a period of better equilibrium between the prices of feed and animal product prices. This equilibrium has been reached by severe losses that resulted in reductions in animal production and by slowing growth in demand to use crops for biofuels, increasing crop yields and a growing crop acreage base as some Conservation Reserve Program land comes back into production.”

Despite the improved outlook, Hurt is opposed to producers expanding.

“I cannot remember a time when there have been so many possible negative events from outside the pork industry that should make producers cautious,” he notes. “We can start with traditional environmental concerns that include odor and water. But that has now been extended to potential negative implications of animal production if climate or carbon legislation moves forward.

“Then there is the Humane Society of the United States that is going directly to the voters to change management practices on animal farms. There is the small family farms initiative that is anti-commercial agriculture. This is certainly being reinforced by the Department of Justice now looking more closely into large-scale commercial agriculture.

“In addition, there are advocates for local production, often associated with small-scale production. Groups continue to hammer on the human health impacts of animal product consumption and U.S. policy in recent years has strongly favored using crops for biofuels rather than food.

“And finally, most lenders will not be willing to extend credit for expansion until balance sheets are enhanced. So, let’s follow the lenders’ lead and give the pork industry a year to get back on its financial feet, and give the world a little more time to sort out how important food is compared to fuel,” Hurt concludes.