The pork production industry has changed. While there's no question about that, there's still a challenge in looking at the industry trends differently. Market analysts and future traders in particular, find solace in historical patterns.
This summer's hog prices have outperformed expectations, and this long run of profitability-- beginning in the spring of 2004-- still has many market watchers wondering why producers have not yet expanded.
"Producers relate their concerns about large market uncertainties and the high cost of buildings as two important reasons for not expanding," notes Chris Hurt, Purdue University agricultural economist. "Also, uncertainty over rising corn prices with booming ethanol use has left many producers extremely cautious."
Of course there are other factors such as the increased consolidation within the industry and environmental issues that have influenced the course of production growth.
While the much improved price performance since May has producers smiling. It has also caused the futures market and its analysts to look for explanations and to increase the forecasts of fall and winter prices.
"The year got off to a rugged start," says Hurt. "In the first four months, live-hog prices averaged $42.24 per live hundredweight. That was more than $9 below the average in the same period in the previous year. It kept revenues just above costs of production."
Looking back, he offers several reasons why prices were so depressed.
First, meat and poultry production were very high. "During the first quarter, beef production was up 6 percent, pork was up nearly 4 percent and poultry was up about 4 percent. Secondly, avian influenza in Europe in the winter and spring reduced broiler exports, leaving that production in the domestic market," says Hurt. "Finally, the pork market expected pork supplies would continue to grow throughout the year with more breeding herd expansion."
However, what evolved was different from expectations, he says. Broiler exports picked up again in late spring, growth in pork supplies early in the year yielded to more moderate increases in the summer, and USDA's June Hogs and Pigs report confirmed little expansion of the U.S. breeding herd.
Today's pork industry is less interested in history and more in price forecasts for this fall and winter. Futures markets have increased price expectations. October lean-hog futures traded around $56 in the spring, increased to near-$60 in the summer, and climbed to about $66 in the past month. The price increase from late May to the present has been about $8 for the October contract and $5 for the February 2007 contract.
Fundamentally, pork supplies are now expected to be up only 1 percent to 2 percent for this fall and winter. "This summer's farrowings are expected to be unchanged and fall farrowings are up only 1 percent. Higher corn prices after this fall's harvest may keep marketing weights close to unchanged as well," says Hurt.
Export demand has continued to enhance hog prices. Exports for the year have been up 15 percent. This has limited domestic market supplies to less than 1 percent. "Finally, indications are that retail margins have been narrower than anticipated this summer, which has added to farm level prices as well," says Hurt.
For June, July and August, hog prices averaged $3.40 higher than during the same period in 2005. If this additional margin were to continue, as now appears likely, hog prices would average about $49 in fourth-quarter 2006 and around $46 in first-quarter 2007. These prices would be consistent with current futures prices of around $66 for October and $62 for February lean-hog futures.
On whether or not to hedge is up to individuals.
"However, these are clearly substantially better pricing opportunities than had been anticipated," says Hurt. "They will provide a considerable profit margin for most producers. Finally, forward-pricing lean-hog futures for the fall and winter is often recommended to be completed by late August or early September when summer cash prices still tend to be high. These are compelling reasons to forward-price now."