If profitability is to return to pork production, producers must continue to cut herd sizes, says Chris Hurt, Purdue University Extension marketing specialist.
"Hog prices are expected to exceed costs in the second and third quarter this year before returning to modest losses in the fourth quarter and into the first quarter of 2010," he notes. "Some further reduction in the size of the U.S. and Canadian breeding herds is expected into 2010. That, along with recovery in the world economy, may provide a slightly more positive tone for hog prices in 2010."
Of course, an improved world economy could also help out corn and soybean demand, which would add to pork production's input costs, he adds.
In the end, 2009 and 2010 may be breakeven years. That's after 18 months of losses, so putting a positive spin on that, he adds: "But breakeven covers all costs, including full capital replacement and family labor costs."
In the months ahead, hog prices should soon begin their seasonal upward trend. For example, in the last five years, live-hog prices have averaged a $10 per hundredweight increase from the second week of April to mid-May. Those using the futures markets expect a similar increase this year. For example, on April 6, the May lean-hog futures price was $9.60 per live hundredweight higher than the April futures price, Hurt points out. The expected rally would take live-hog prices from the low-$40s into the low-$50s over the next four weeks or so.
"These higher prices tend to be maintained through August and would be expected to range from $50 to the mid-$50s, depending on the week," he adds. "Second-quarter prices are expected to average $51 with production costs around $49. This small quarterly profit would be the first after six consecutive quarters of losses dating back to the fourth quarter of 2007."
There are some other positives as well. Size of the U.S. breeding herd and upcoming farrowings are a bit smaller than expected. USDA's March pig-inventory report showed the breeding herd is now down 3 percent, and farrowings will be down 3 percent this spring and 4 percent this summer.
Adding to a smaller U.S. slaughter supply this year will be 2.3 million fewer hogs coming from Canada.
Still, hanging overhead are the prospects for higher feed prices and weak pork export demand. "The trend toward higher corn and meal prices came from smaller-than-expected planted acres and March 1 stocks," he notes. "Since the release of those reports on March 31, higher corn and soybean meal prices have added to pork production costs by $1.25 to $1.50 per live hundredweight. Those costs are estimated in the very high $40s for 2009 and about $50 for 2010."
Hurt points out that tighter-than-expected corn and soybean inventories mean that any harmful growing weather conditions this spring and summer would force prices higher. However, he doesn't see the dramatic price run up seen last spring.
Slowing U.S. pork exports are another major factor keeping the industry from registering better profits. U.S. pork exports are expected to be down 14 percent this year from last year. "This means there will be almost 700 million pounds less pork shipped out of the country, and that will have to be absorbed by domestic consumers," Hurt says.
In the end, while there will be about 2 percent less domestic pork produced this year, the per-capita supplies will be nearly unchanged from last year due to reduced exports. "This means that 2009 average hog prices probably will not be much different than last year's-- around $48 liveweight," he says. "The difference in profitability, then, is due to expected lower feed costs compared to last year, with total estimated costs at $48.50 versus $54 in 2008."