The North American pork industry must reduce its breeding herd. Canada has started with it's government funding a program to boost culling 10 percent beyond the "normal" annual rate. In all, this will remove 150,000 sows from the breeding herd and reduce annual production by about 3 million pigs. To receive payment for each animal culled, producers must agree to empty at least one barn and to leave it empty for at least three years.
In the United States, some producers have committed to cutting their breeding herds somewhat. For example, Smithfield officials say they will reduce 40,000 to 50,000 sows. But what is enough?
"Pork producers face a period of excessive pork production while also battling historic feed price escalation," says Chris Hurt, Purdue University Extension marketing specialist. For the producers that remain, Hurt believes there will eventually be a recovery. "Hog prices probably will not improve sufficiently to reach breakeven levels until the late-spring 2009," he says. "Then, the last-half of 2009 and 2010 could be a period of favorable profits."
Of course, this all started in the fourth quarter of 2007, when pork supplies were up 10 percent. From January through March 1, this year's supplies have been 11 percent higher than a year ago, and "there is no end in sight," Hurt says.
U.S. sow slaughter so far has not yet reflected liquidation. While total sow slaughter has been modestly higher than last year, the slaughter as a percent of the herd has not increased, Hurt notes. High farrowing rates have continued at least into last month, and those pigs still have to be marketed, so September is the earliest possible chance for reduction.
Hog prices in the first two months of 2008 averaged near $40 per live hundredweight, with farrow-to-finish production costs estimated near $54. First quarter losses are now expected to be about $34 per head. That follows estimated losses of $19 per head for the final quarter of 2007. That compares to Hurt's record quarterly losses for fourth quarter 1998, at $45 per head.
"Hog prices will improve this spring and summer. However continued large pork supplies are not expected to allow hog prices to catch up to spiraling costs," Hurt notes. Spring prices are expected to rise to the high $40 and to the extremely low-$50s for a third-quarter average. Some reduced supplies should surface by late 2008, with prices in the upper $40s. For the year, Hurt projects an average price of $47 per live hundredweight.
The grain and soybean markets will remain volatile. "Given corn and soybean meal futures prices on March 3, costs for farrow-to-finish producers are estimated to be in the high $50s and could reach near $60 this summer," he says. "For the year, costs are estimated near $57, with hog prices near $47, for an average loss of $27 per head. This compares with an estimated loss of $15 per head in 1998, the previous record-loss year."
Lean futures prices suggest higher cash prices than forecast here and offer some pricing opportunities. "Using current lean futures (and adjusting basis about $2 lower than average) provides hedging opportunities at about $54 for third quarter 2008 compared to the forecast," Hurt adds. "For the final quarter of 2008, futures are providing about $52 compared to the forecast of $47 to $48."