Pork Cutout Value Offers Optimism

The year began with a sharp run-up in the wholesale pork price. The cutout value, which was under $55 per hundredweight as recently as mid-October, reached $77 in mid-January, the highest it has been since September 2008. For 2009, the pork cutout averaged only $58.22 per hundredweight — the lowest annual average since 2002.

Last year’s cutout value was dragged down by reduced pork exports, the U.S. economic recession and a consuming public frightened by the Novel H1N1 influenza virus (popularly called swine flu). Hog prices are highly correlated with pork cutout value, and since it usually trends higher from January to June, there is good reason to be optimistic about higher hog prices in 2010.

Profitability Drives Herd Size

U.S. pork producers have lost over $6 billion in equity since the red ink began flowing in October 2007, and profitability drives herd size. The U.S. sow herd peaked in December 2007 and has been declining ever since. The December 2009 swine breeding herd was down 3.5 percent from 2008 and down 6.1 percent from December 2007. 

The hog-slaughter decline is not expected to be as great as in the sow herd. Pigs per litter have increased 2.2 percent annually over the last two years. Fortunately, the number of  hogs from Canada is rapidly declining. The United States imported 10 million live hogs from Canada in 2007, 9.3 million in 2008, but only 6.4 million in 2009. This year’s imports are expected to be down significantly again.

Feed Price Keeps Breakevens in Flux

Feed price fluctuations are causing the greatest changes in production costs. When corn prices were close to $2 per bushel, breakeven prices for slaughter hogs averaged about $40 per hundredweight on a live basis. In 2008, when the farm price of corn averaged $4.78 per bushel, the hog breakeven price averaged about $57 per hundredweight.

With a record crop in 2009, USDA forecasts imply that 2010 corn prices will average close to $3.75 per bushel. If so, the breakeven price for slaughter hogs will likely average near $52.50 per hundredweight on a live basis — $69 on a carcass basis.