Chris Hurt, Purdue University agricultural economist, compares the current losses experienced in the pork industry to the 1998/1999 period. The economist estimates losses for 2007 to present have been twice as much as the 1998/1999 period. However, there has not been near the liquidation.
Hurt estimates a 10,000 head per year producer would have lost $213,000 during seven quarters, beginning in the first quarter of 1998. In contrast, the economist estimates losses from the fourth quarter of 2007 through the second quarter of 2009 accumulate to $315,000 for the same 10,000 head per year producer. “This time, the industry’s losses have primarily been related to much higher feed prices,” Professor Hurt explained.
“Unfortunately, forecasts predict losses to continue for three additional quarters, through the first quarter of 2010. This means total losses could rise to $396,000, making the downturn both longer and more severe than in 1998 and 1999.”
Hurt believes that the pork industry has been much slower to reduce the breeding herd during the current period. “In the past two years, the US breeding herd has dropped by just 3 percent,” he said. “But from mid-1998 to mid-2000, the breeding herd dropped 10 percent.”
Hurt gives four possible reasons for the lack of reduction in the breeding herd:
1. Feed costs. “Perhaps producers were not convinced that feed prices would remain high after their dramatic increase in late 2007,” says Hurt.
2. Exports. Hurt says the export surge experienced in 2008 was due to a cheap dollar and a spike in exports to China. Since then, pork exports have returned to lower, more normal levels.
3. Industry structure. The industry has never faced the need for a downward adjustment amid the concentrated production environment present in today’s pork industry.
4. Profits earned from 2000 until the final quarter of 2007 were large. “A farm that has been in continuous production since 1998, with losses near $400,000 on this downturn, could be operating from a high equity base.”
It’s likely not all hog farms are in financial trouble, says Hurt. He says that operations started in the last three years or those that have expanded in the past few years may be more vulnerable to the current economic hardship facing the pork industry.
Hurt expects modest losses this fall, with live hog prices averaging about $40 to $42 and all costs near $45. “For all of 2010, I expect a modest profit of $2 to $5 per head.”