One way to get a pork producer's attention is to mention 1998. That year saw the lowest of the lows for prices and profits, as red ink flowed everywhere.
Well, at least one agricultural economist is pointing to 2008 as an equal or tougher year. According to Chris Hurt, Purdue University ag economist, "2008 may replace 1998 as the worst financial year for pork producers in modern history."
High feed costs are the No. 1 culprit, but No. 2 is too many hogs. "The unrelenting climb of corn and soybean meal prices may drive 2008 costs to the highest annual level ever," notes Hurt. "In addition, there continues to be more slaughter hogs than accounted for in USDA inventory reports, with no signs of moderation."
Forecasted slaughter numbers heading into fourth quarter 2007, pegged a 4.5 percent increase, but actual slaughter was up almost 9 percent. Where did the extra hogs come from? "USDA increased last spring's farrowings somewhat, but there were still nearly 3 percent unexplained slaughter hogs," says Hurt. "The great worry is that there may still be more hogs than USDA has counted in the December update."
That report indicated a 4 percent increase in slaughter for the first five months of 2008. But if USDA has undercounted, slaughter could be 6 precent to 7 percent higher. December's numbers suggest a 3 percent to 5 percent increase in each of the first three quarters of the year. Come the fourth quarter, production may equal 2007 levels, but that's too much pork, Hurt notes.
Live-hog prices are expected to average in the very low $40s per hundredweight in the first quarter of the year, rise to the high $40s for the second and third quarters, and finish the last quarter with mid-$40s averages, based on live-weight prices for 51 percent to 52 percent lean carcasses. For the year, the average price at $46.30, would be down from $47.10 in 2007.
But corn and soybean meal futures prices point to record high prices, which will mean record high production costs for pork producers. Using early January corn and soybean meal futures (adjusted to cash purchase levels), Hurt estimates a 2008 production cost of $55.60 per hundredweight. "These estimates suggest a loss of about $9.30 per hundredweight, or nearly $25 per head on average for the year," says Hurt. "This would exceed 1998, with an estimated loss of $6.78 per live hundredweight."
In anyone's book, production costs at $55.60 would be extraordinary. For the previous 10 years, costs averaged $40.64 per live hundredweight, with 1996 reporting the previous record at $48.93.
What can pork producers do? "Producers may want to base strategies for 2008 on a 'survival mode.' If they can get through 2008, hog prices will likely recover in the spring or summer of 2009," says Hurt.
On the demand side, he says the industry needs to work quickly. "Retail pork prices have continued to move upward. Retailers need to be encouraged to lower pork prices by being reassured that wholesale pork prices will remain low in coming months. Foreign buyers need to be encouraged to increase purchases at this time of low-priced wholesale cuts. A special effort needs to move forward with China to resolve issues that may be constraining their purchases," he says.
On the supply side, producers can, and will, cut market weights; re-examine feed efficiency, starting with feeder adjustment; and low-performing animals should be rapidly culled. Finally, the industry must cut the breeding herd, possibly by 3 percent to 5 percent, which has likely begun and will continue through the first half of the year.
"They say it is darkest before the dawn, but the dawn will not be in sight until pork producers reduce production to better align with this new high cost era," Hurt concludes.