Worldwide food demand continues to climb. A Food and Agricultural Policy Institute study conducted at the University of Missouri reported that foreign purchases of U.S. agricultural products should keep rising.
“The next 10 years are going to be a good time for U.S. agriculture,” says Ron Plain, University of Missouri agricultural economist.
But that presents a double-edged sword. Hog prices may rise, but so will your production costs.
On one hand, pork export sales will grow, adding dollars to hog prices and your profit. On the other hand, world demand for U.S. grains also appears bound to grow.
And many foreign buyers, once they establish a source of grain, will continue to buy regardless of the cost. For you, that means high grain prices are likely to be the norm in coming years.
“Foreign markets tend to have an inelastic demand for U.S. agricultural products,” Plain says. “They don’t back off much when the price goes up. If we have a grain shortage, the foreign customers may keep buying, and the U.S. market will have to absorb any shortage.”
The result can be wild swings in livestock and grain prices, which means you’ll have to be more careful about managing feed and hog price risk.
Plain suggests buying grain at harvest, or soon thereafter, and arranging for storage even if you have to pay the cost-of-carry (a premium for storage if you don’t have enough to hold the grain yourself).
If you don’t buy grain at harvest, keep watch for affordable call options as a way to protect costs.
“In the future, you may need to worry as much about feed costs and supply as you’ve worried about hog prices in the past,” Plain says.
“The days of breakeven cost of production in the low $40s will be rare,” Plain predicts. “We’ll see considerably higher average corn prices ù maybe by as much as 40 cents to 50 cents a bushel.”
That will raise your production costs and affect your perspective of good hog prices. If you lock in hog prices, be sure to cover your anticipated higher production costs.
Plains suggests $46 to $47 per hundredweight (live weight) costs of production may be common, with $48 to $49 possible in some operations.
“Those are the levels I’d plan for when looking to sell my hogs,” he says.
Locking in $2-a-bushel corn may have been a great plan in the 1980s. But now $2.75 per bushel may turn out to be a good deal, because you will avoid the possibility of having to buy $3-plus corn down the road.