It was true in the fall of 1998, and it's even more true today– pork producers who are not aligned in some way with a packer will get hurt the most when hog supplies burden capacity and prices drop.

Also true then and now, is the fact that the producer/packer marketing contracts most commonly used are tied to the cash market. That makes for a rocky ride for producers with contracts, but at least the producer has some shackle-space security.

It's the "end of the line for the few truly independent pork producers," according to Chris Hurt, Purdue University Extension marketing specialist. "The financial risks of not being aligned in some way in the pork-marketing chain are just too extreme."

He believes that many families and pork corporations will not get through this period of low prices, but those who stick with it– or counter-cyclical investors– can expect handsome returns in late 2003 and 2004."

Hurt describes the past two week's in the pork industry as a "panic attack."

Industry economists had warned producers, beginning as early as last spring that this fall could be a wicked price ride– similar to fall 1998. But, the financial crunch has begun earlier (before Labor Day) than anyone expected. However, aggressive sow liquidation, producers pulling hog marketings ahead of schedule and the drought, which sent feed prices higher, have set the panic in motion, notes Hurt.

Live-hog prices started out low in August and then conditions grew worse. Terminal prices started the month in the mid-$20s hundredweight and ended in the $15 to $18 range. However, those prices don't reflect base values that producers are receiving at packers.

"The national base price for 51 percent to 52 percent lean animals on a liveweight
equivalent ended August around $27," says Hurt.

It's hard to determine what any given pork producer is being paid because of the tremendous range in price quotes by market and type of contract. Hurt points to this example: On Aug. 28, Midwest base prices were quoted from $24 to $37 per live hundredweight, with a weighted average of $28.

"Hogs without contracts, where the producer negotiates the price of each load, received the lowest prices. Highest prices were for producers in a category known as 'other purchase agreements,' which is a non-formula agreement. Those values were between $27 to $32 on a liveweight equivalent," notes Hurt.

Hog supplies surged in July and August, increasing 7 percent over year ago levels. USDA inventory estimates suggested 2 percent more hogs for that period. The difference between the actual and the estimate– and whether that trend will continue– has the industry in a cold sweat.

"For the two months, sow slaughter ran 20 percent over slaughter numbers vs. last year," notes Hurt. "Also, increases in Canadian live-hog imports accounted for nearly 1 percent additional slaughter. These two factors account for about 2 percent of the unexplained slaughter levels".

A third factor, Hurt believes, is advanced hog marketings. By late August, producers pressed the panic button and began selling hogs at lighter weights. "In early August, weights were nearly 1 percent higher than a year ago, but by late August, weights were down slightly," he adds.

Add all these factors and you still can't fully account for the large hog runs. That means USDA's June inventory may still have underestimated hog numbers by about 2 percent.

Demand has been negative as well. Trade restrictions on U.S. broiler exports to Russia, the ailing U.S. economy, abundant meat supplies, a 5 percent decline in U.S. pork exports and a 17 percent increase in imports this year have pushed cold-storage pork stocks up 40 percent.

"The best news is that sows are being liquidated fairly rapidly," says Hurt. "Sows not bred in August, will not farrow in December, and pigs will not be marketed next June." The bad news is that the industry is still nine months away from seeing the impact of sow liquidation and smaller pork supplies.

Strong sow liquidation is expected through the fall. USDA's September Hogs and Pigs report– released on Sept. 27– will likely show a breeding herd similar to 2001, with the market herd up about 3 percent.

"It appears that 51 percent to 52 percent lean-hog prices (on a live-weight equivalent) will be $26 to $28. Prices may improve to $28 to $31 for the winter and near the mid-$30s by spring. Summer, prices could be back into the low $40s, with mid-to-higher $40s in late summer and fall 2003," says Hurt.

Production costs could be near $40 per hundredweight, which means losses could average $34 per head this fall. "In comparison, estimated losses during fourth quarter 1998 were $45 per head," he adds.

Whether the sky is falling or not, is a personal issue. But the storm clouds certainly are brewing.