Glenn Grimes, University of Missouri professor emeritus of agricultural economics, began his outlook talk at World Pork Expo with a stern warning: “If you want to make the hog business part of your future, you need a plan on how to survive the next 12-15 months.
“You need to look at both the grain side and the hog side and start thinking about how to minimize your losses rather than maximize your profits.”
On the grain side, increasing global energy demand is driving corn prices higher. U.S. corn usage from 2000 to 2007 climbed 30%, says Grimes. Use by livestock continues to hover around 50%. Ethanol has gone from about ¼ to ⅓ of corn stocks during that time, and corn exports have about doubled.
Using 30-year price plateaus established for corn during the last 100 years, Grimes projects the price for corn will average $4-5/bu. during the next 30 years.
Based on those grain price estimates and other rising production costs, Grimes pegs the cost of hog production for the next year at an average of $65/cwt.
A June 12 Feed Outlook report from USDA's Economic Research Service lowered 2008-2009 corn production by 390 million bu. to 11.7 billion bu. The decline reflects lower expected yields due to slow planting progress and slow crop emergence, hindered by persistent, heavy rainfall across the Corn Belt.
As a result of slower plantings, USDA has dropped projected corn yield by 5 bu. to 148.9 bu./acre. The 2008-2009 farm price for corn is projected at $5.30 to $6.30/bu.
Based on current weather conditions, climatologist Elwynn Taylor of Iowa State University forecasts 2008 corn yields will average 148 bu./acre and corn price at harvest based on December futures contract will be $6.85/bu. He forecasts soybean yields to average 37 bu./acre.
A key driver in the growth of pork production over the last 70-80 years has been production efficiency. “Since 1930, we have reduced sow inventory by 42% and increased annual pork production by 221%,” Grimes states. Annual pork production/sow growth has accelerated over time. From 1930-1980, it was just over 2%, while from 1980-2007, it grew at an annual rate of almost 2.8%.
How has that growth from 1930 to 2007 been achieved?
Pigs/litter grew from 6.0 to nearly 9.5.
Litters/sow/year went from 1.3 to nearly 2.3.
Pigs/sow/year skyrocketed from 7.5 to 21.
Average hog carcass weight climbed from 125 lb. to 200 lb.
Based on elastic demand for hogs, it takes a 1% change in supply to achieve a 2% change in price. At that rate, Grimes says, it appears that pork producers will need to reduce production by 10-12% to return hog prices to profitable levels — “and that will be painful,” he reflects.
Along with pork exports, demand has helped to prop up hog prices beyond expectations, considering record pork supplies. Grimes says for the first four months of 2008, consumer demand for pork was up 2-3%, while live hog demand improved 5% or more.
At the same time, U.S. commercial pork production reached nearly 22 billion pounds in 2007, having increased each of the last seven years. This unprecedented level of growth makes the hog cycle longer and less predictable. It also means adjustments on the downside will also take longer, says Grimes.
One bright spot is that hog slaughter weights have finally dropped. According to USDA data, for the week ending May 10, weights were down 2 lb., and 1 lb. for the week ending May 17.
U.S. hog slaughter capacity of 425,000 head slightly exceeded 2006's levels, based on survey data from Steve Meyer, Paragon Economics, Inc. That level of capacity should ensure adequate slaughter capacity this fall, as long as all plants stay in operation, Grimes notes.
Hog Pricing Opportunities
The hog futures market has offered better pricing opportunities than the cash side for the last 18 months, Grimes comments. “Roughly 11% of independent producers who used futures contracts from August 2007 to March 2008 got about $120 million more than they would have had they sold their hogs on the spot (cash) market.”
Continued increases in productivity for 2008 are fueled by farrowings that are 1-3% above a year ago, 2-3% higher productivity growth and more live pig/hog imports from Canada. That all adds up to a 7.5% increase in U.S. hog slaughter, totaling 117.3 million head for 2008.
On a live weight basis, Grimes estimates hog prices will average $46/49/cwt. for 2008, based on Iowa-Minnesota markets. Averages were $47.53 in 2006 and $47.05 in 2007.