Hog supplies offer little hope of high summer prices. The good news is that low input costs can partially offset low prices.
If things go according to form – which is always a big if – hog prices may be peaking for the year about the time you're reading this.
A rally to or above $40 per hundredweight live-weight ($54 per hundredweight on a lean carcass basis) appeared likely in late spring or early summer. Late-April futures prices suggested a forthcoming rally. All lean hog carcass contracts on the board were above $54 (about $40 live-weight).
Enjoy whatever rally you see while it lasts. Ron Plain, University of Missouri agricultural economist, says this is the high point for 1998.
Market analysts estimate 98 million to 100 million hogs will go to slaughter in 1998 vs. 92 million in 1997. Pork production could hit 19 billion pounds in 1998, says James Mintert, Kansas State University livestock economist. That's up from 17.24 billion pounds in 1997.
With those numbers, hog prices are likely to retreat to the $30s and stay there for the rest of the year. Plain sees prices below $40 by late August and trading as low as $32 ($43.24 carcass basis) by Thanksgiving.
Mintert pegs an Omaha live-market average of $39 to $43 for the third quarter of this year, followed by prices averaging in the upper $30s to perhaps the low $40s for 1998's final quarter. He sees 1999 prices hovering in the upper $30s.
Plain agrees that 1999 prices won't rise much from this year's levels. It will be 2000 before the hog cycle kicks in and makes pork production profitable for most operations again, he says.
"If prices rally and you can lock in hog sales at prices above your breakeven for this fall or early 1999, you probably should do it," Mintert says.
There's little to suggest the downward pressure will ease through 1999. One event that could change the scenario would be a decline in the U.S. dollar's strength. That could spur more imports to Asian nations that have purchased less pork than expected during the last year.
Will higher pork exports help boost U.S. pork prices? Plain and University of Missouri colleague Glenn Grimes say not enough to keep 1998 from being an unprofitable year for producers with high production costs.
But exports are starting to offer some better news than last year. Since July 1997, Japan has been buying more fresh-chilled U.S. pork. In fact, U.S. pork exports in January and February were up 40 percent over 1997 levels. That's with a strong U.S. dollar and a weak yen. So pork exports are improving.
The real silver lining is feed costs. In late April, you could buy corn for about $2.50 a bushel. Soybean meal was a steal at $160 a ton.
In fact, corn futures were below $2.66 a bushel for each contract month through September. Soybean meal futures were below $165 a ton through October. Barring bad weather, those prices aren't likely to rise much this summer.
El Ni±o is still active, and it won't weaken until late June at the earliest, according to Elwynn Taylor, Iowa State University meteorologist.
That means it will likely be a good crop year, says Bob Wisner, Iowa State University extension grains analyst. He says strong El Niño events greatly increase the odds of record or near-record growing seasons in the United States.
"If Taylor is right, we won't have to worry about drought until the end of August at the earliest," Wisner points out.
The outlook now is for a wetter and cooler summer than normal. The only downside is whether the weather will be too wet to produce near-record crops.
Wisner points to 1993, an El Ni±o year that brought devastating floods to the Midwest. No one predicts a repeat, but it's one danger of a wetter season.
Patchy spring rains did delay some farmers from entering the fields. If crops end up getting in the ground late, it raises the odds that a late drought or early frost might curtail yields.
Barring such extremes, Wisner sees a good or even great crop year ahead. In late April, he projected at 138-bushel-per-acre yield and harvest price lows of $2.15 per bushel for corn.
He sees more acres of soybean production because soybean prices are higher than either corn or wheat prices. Oddly enough, soybeans and soy oil are in demand due to El Niño's harsh effect on palm oil exports from Indonesia. With those supplies low, the world market is turning to U.S. soybean oil.
When oil drives strong soybean crush, the excess meal gets cheaper. That is what you're seeing now and are likely to see throughout the summer.
Many northern U.S. fields that traditionally grow canola, oats or wheat may be planted with soybeans this summer, says Wisner. That could keep soybean meal prices low into next year.
The real weather danger looms for the 1999 crop. If El Niño ends and the
opposite phenomena, La Niña, develops, you could see a greater chance of drought in the Corn Belt next summer.
Combine that with continued low hog prices and even the best producers may suffer seriously in 1999. For now, the wisest strategy may be to lock in low input costs when you can and sell hogs ahead anytime the market rallies to or above your breakeven level.
It's no secret that 1998 won't be as profitable as the past two years for the average U.S. pork producer.
PORK DEMAND HOLDS STRONG
High meat supplies eventually may reverse the growing domestic demand for pork. For now, however, demand remains encouragingly strong.
"I'm surprised at how well we've done on U.S. demand for pork given the total amount of meat available," admits Ron Plain, University of Missouri agricultural economist. "I was expecting domestic pork demand to drop this year under the weight of an extra 7 pounds of meat per capita."
Data from January through March 1998 shows pork demand is still climbing. That's after an increase in 1996 and an even larger gain in 1997.
Of course, the key to demand is retail pork prices. There have been some price cuts tied to in-store promotions, but prices have generally held strong, particularly for boneless pork chops. The point is consumers are continuing to buy pork. Any retail price declines prompted by abundant supplies could easily encourage them to buy more. If pork backs up in the pipeline, hog prices will reflect it.
Per capita meat consumption is on track to set a record this year. Only time will tell if pork demand stays strong through 1998, but the industry is reaping some benefits for now.