With hog prices outperforming expectations this summer, observers wonder why producers are not expanding.

“The pork production industry has been profitable since the spring of 2004,” remarks Chris Hurt, Purdue University Extension swine specialist. “Producers, however, relate their concerns about large market uncertainties and the high cost of buildings as two important reasons for not expanding.

“In addition, uncertainly over rising corn prices with booming ethanol use has left many producers extremely cautious,” he adds.

Hog prices have made large gains since May that have caused analysts to look for explanations and to increase fall and winter price forecasts.

“The year got off to a rugged start,” says Hurt. “In the first four months of 2006, live hog prices averaged $42.24/cwt. That was more than $9 below the average in the same period in the previous year and kept revenues just above cost of production.”

Why were prices so depressed?

“First, meat and poultry production were very high,” notes Hurt. “During the first quarter, beef production was up 6%, pork was up nearly 4%, and poultry was up near 4%. Secondly, avian influenza in Europe in the winter and spring resulted in reduced broiler exports, with that production pushed back into the domestic market.

“Finally, the pork market expected pork supplies would continue to grow throughout the year with more breeding herd expansion. What evolved was different than expectations. Broiler exports picked up again late in the spring, the growth in pork supplies early in the year yielded to more moderate increases in the summer, and the USDA’s June Hogs and Pigs report confirmed little expansion of the U.S. breeding herd.”

Futures prices have increased price expectations. October lean hog futures have increased from $56 in May to $66 recently.

“Fundamentally, pork supplies are now expected to be up only 1-2% for this fall and winter,” says Hurt. “This summer’s farrowings are expected to be unchanged and fall farrowings are up only 1%. Higher corn prices after this fall’s harvest may keep marketing weights fairly close to unchanged as well.

“Foreign demand for pork has continued to enhance hog prices. With data currently available, exports for the year have been up 15%. With more pork moving out of the country, the available supplies in the domestic market have been up less than 1% this year. Finally, indications are that retail margins have been narrower than anticipated this summer, which has added to farm level prices as well.”

For June, July and August, hog prices averaged $3.40 higher than for the same period in 2005. If this additional margin lasts, which appears likely, hog prices would average about $49 in the last quarter of 2006 and around $46 in the first quarter of 2007.

Hurt says the current hog market provides substantially better pricing opportunities than earlier anticipated. If producers choose to forward-price their hogs for the fall and winter, they should complete this process by early September while summer cash prices still tend to be high.