Boom and bust pattern continues for pork

Boom and bust pattern continues for pork

University economist says pork producers need to be cautious about further pork herd expansion

The pork industry's bout with PEDV and uncertainty over the estimated death toll resulted in fear among some pork buyers, says Purdue University economist Chris Hurt, exploding hog and pork prices to record highs with the national live price reaching $100 per hundredweight.

Related: Two PEDV research proposals earn Zoetis grants

University economist says pork producers need to be cautious about further pork herd expansion (Photo by Scott Olson/Getty Images)

"In recent weeks, live hog prices reached five-year lows near $45 per live hundredweight, a price bust from record highs a year earlier," Hurt said. "The inability to refute the rumors of massive death losses a year ago contributed to prices overshooting to the upside. The reality that pork production was only down 2% in 2014 and is now moving up rapidly in 2015 helped create what may be the greatest collapse of hog prices ever. A classic boom-and-bust price pattern. Now the market is evaluating whether prices have overshot to the downside and will recover or whether large pork supplies will justify current prices."

February pork supplies were expected to be up about 3%, while actual supplies have been up 7% due to 4% more hogs reaching the market than anticipated.

USDA's hogs and pigs inventory count in December appears to have undercounted the number of young pigs, according to Hurt.

Higher slaughter numbers so far this year also raise questions as to whether pork producers have also expanded sow numbers and farrowing intentions more than USDA picked up in their December survey. Based on that report, pork supplies in the last half of 2015 were expected to be up 6 to 7%.

"If expansion has been more robust, could this mean 8 to 10% more pork in the last half?," Hurt asked.

According to Hurt, anticipated pork supplies have been growing this year, and that has also been the case for competitive meat production. Since December, projections of beef and poultry production for 2015 have risen an additional 2% from early-winter projections.

Other factors contributing to weakened hog prices in the new year have included a weak world economy and the West Coast port slowdowns, which account for nearly half of all pork exports. These two forces have led to lower anticipated 2015 U.S. meat exports.

Related: Economist: Hog breeding herd expanding to meet demand

"Pork supplies could average about 6% higher in the second quarter and then 7 to 8% higher in the last half of the year," Hurt said. "This could mean about 6 to 7% more pork for the entire year.

Using year-to-date actual prices and futures forecast for the remainder of the year suggest a yearly average price near $55 per live hundredweight, down from the extraordinary record of $76 in 2014 (previous record was $66 in 2011).

Hurt said that prices would average near $51 in the first quarter, then move higher to about $59 for the second and third quarters, and close the year in the very low $50s.

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Fortunately for pork producers, costs of production are expected to be at five-year lows in 2015.

Total costs are estimated at $52.25 per live hundredweight, compared with $57 in 2014. The biggest decrease in feed costs in 2015 is expected to come from soybean meal, which may be $120 a ton lower ($360 per ton this year versus $478 in 2014 based on Decatur high-protein prices). Corn costs are expected to be $3.83 per bushel this calendar year compared to $4.09 in 2014. Corn costs are based on U.S. farm prices.

Record-high profits in 2014 are expected to come back to earth in 2015.

Last year's estimated profits were $53 per head, beating the previous annual record of $39 in 2005. "Given current anticipated hog prices and costs, modest losses are expected in the first and fourth quarters this year with about $19 per head of profits in the second and third quarters," Hurt said. "For the year, a modest profit of $8 per head is anticipated."

Hurt said that pork producers need to be cautious about further expansion until more information can be gathered.

"The first question is how important will PED losses be to hog numbers this year, and second has the industry already expanded more than USDA picked up in the December Hogs and Pigs report? Weekly slaughter numbers will provide information on past PED losses, and the March Hogs and Pigs report on March 27 will give clues to the degree of expansion. Damage to pork exports due to West Coast pork slowdowns should begin to resolve itself in coming weeks as port activity returns to more normal patterns.

"If the industry has already expanded sufficiently to drive prices down near costs of production, further expansion could push the industry into losses," Hurt concluded. "Feed prices are expected to be the lowest since 2010, but yield variability has been high in recent years. U.S. yield variability is particularly high on corn, and with fewer acres planted in 2015, lower yields could still cause much higher feed prices than are now being anticipated by corn futures markets."

Source: University of Illinois

TAGS: USDA
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