Pork producers are losing money on each hog they sell today -- to the tune of $20 to $30 per animal. Following USDA's March Hogs & Pigs Report, which showed the breeding herd unchanged from March 2007 and spring farrowing intentions that also equal last year's levels. Fall production is expected to rise by about 1 percent, followed by a 2 percent decline next winter.
So, itlooks like those losses will be hanging around for a while. Just how long depends on producers' commitment to cut back. "That means aggressive liquidation, most likely based on financial attrition," says Chris Hurt, Purdue University agricultural economist. "That is not a pretty solution, but it is the market solution, and markets can be brutal.
"As those producers go down one by one, many of them may lament the crazy times they were caught up in as the biofuels era and the unusual macroeconomic events changed agricultural market relationships in 2008."
While that is true, the industry also is responsible. As a whole, producers may have gotten a bit drunk off of nearly 5 years of profits and a soaring export market. Too much of a good thing tends to produce extreme swings. The question is, "Who is going to bail out the pork industry?" Hurt asks.
He points to the Federal Reserve Bank of the United States which has recently helped assure that an investment bank would remain liquid. Congress also is considering assisting homeowners caught up in sub-prime mortgage problems. But pork producers are on their own.
"Farm-state politicians in the upper Great Plains hope to add billions of dollars for disaster assistance in the next farm bill, even before there is a disaster. Perhaps they need only to look to the pork industry to see a financial disaster in progress," he says. Pork industry-wide losses may total $3.5 billion this year, an amount that nearly equals 25 percent of the total production value.
Hog prices averaged only $39.50 on a live-weight basis in the first quarter. Given the 10 percent increase in production, that surfaced the price is higher than could have been expected, Hurt notes. "Prices are going to improve seasonally in coming weeks, but they will remain disappointing for all of 2008." Second-quarter prices are pegged at $47, with third-quarter prices averaging just $1 better. Fourth-quarter prices may average near $45, with winter prices gaining about $2.For 2008, prices may average about $45, which is the lowest level since 2003.
Unfortunately, he adds, there has not been enough sow liquidation yet. Sow slaughter in the first quarter was up about 8 percent from a year ago, but this was only enough to reduce the March 1 breeding herd by less than 1 percent. He believes a 6 percent to 8 percent cut is needed.
Feed costs won't let up this year. While soybean meal prices have dropped nearly $50 per ton from the early March highs, corn prices have risen more than 30 cents per bushel and largely offset the advantage of lower meal prices. With hog prices averaging a mere $45 per hundredweight this year, costs are expected to be near $57 per live hundredweight.
There will be no bailout, as pork production's losses will not create a financial panic as was the concern if Bear Stearns were to fail, he notes.