Record Breakevens into 2013

A great spring turned into a brutal summer.  Hot, dry weather has seriously damaged the corn and soybean crops. For the first time, corn futures have traded above $8 per bushel, soybean futures above $17 per bushel and soybean meal futures above $500 per ton. In 2011, corn averaged $6.01 per bushel, and the breakeven hog price calculated by Iowa State University was $65.02 per hundredweight (live) or $85.55 on a carcass-weight basis. If the futures market is right, the average corn price in 2012 and 2013 will be between $6.50 and $7 per bushel.  The breakeven hog price for $6.50-corn will be about $68 per hundredweight (live) or $90 (carcass).  For $7-corn, it will be close to $71 per hundredweight (live) or $94 (carcass).  It is doubtful consumer demand will support hog prices at those levels.  

A Productivity Blip?

USDA’s June hog inventory survey indicates producers plan to farrow 2.901 million sows this summer and 2.89 million in the fall. For the last three years, sows farrowed per quarter held steady at 2.9 million litters. That number broke 3 million for nine consecutive quarters starting in spring 2007, resulting in 2008’s record hog slaughter of 116 million head. 

In the last two years, most  production growth came from pigs per litter and slaughter weights.  Pigs per litter averaged an annual growth rate under 1 percent for 2000 to 2006.  From 2008 to 2011 it averaged a 2 percent annual increase. This spring was only 0.6 percent above March/May 2011 levels.  Was this spring’s smaller increase due to weather or disease, or is it a return to a more typical rate?

Packers will Absorb Losses for a While

Spring hog prices were disappointing, but it wasn’t the packers’ fault. Carcass hog prices were higher than the pork cutout (the wholesale value of meat cuts from 100 pounds of carcass). From April to June, the national base hog-carcass price averaged 102.6 percent of pork-cutout value; long term it averages 92 percent. 

In part, strong hog prices relative to cutout value this year are due to strong byproduct values. Exports have boosted values of pig organs, feet, blood meal and such.  In part, the high hog price/cutout value ratio is due to tight packer margins.  Hog prices were high relative to pork cutout in the first half of 2009 but dropped in 2010.  Packers will absorb losses for a while, but eventually the ratio of hog prices to wholesale pork value will drop.