Following USDA’s June Hogs and Pigs Report there was a lot of bullish talk about the hog market. Indeed the June report reflects little growth and a steady hand navigating the U.S. pork production ship. As a result, it should extend pork producers’ profitability in 2006.
Certainly profitability is an important and welcome trait for any business, and having a positive outlook is a good thing. But, while futures-market traders and others focus on percentage differences from one quarter or one year to the next, it’s important not to miss the big picture.
The June 1 breeding herd at 5.97 million head is up a modest 0.7 percent from the same period in 2004. Also, summer and fall farrowings remain unchanged. Both are generally positive.
But productivity continues its upward trend. Annual increases of 3 percent have been the standard for several years now. The June report showed a record gap in litter size between producers running “small” operations and those running “large,” with the latter averaging 9.02 pigs per litter.
As more hogs are produced from those large operations that productivity has more impact on eventual market hog numbers. The 2004 Pork Industry Structure study shows producers raising 50,000 or more hogs annually account for 59 percent of all U.S. market hogs.
Keep in mind that current pork production projections fall on top of last year’s record of 103 million market hogs. Add to that heavy carcass weights — at times averaging 200 pounds. So, even with modest gains this year’s production is still on course to set another record.
“Pork supplies will be larger in the next 12 months,” notes Chris Hurt, Purdue University agricultural economist. For now, supplies are expected to increase about 2 percent.
As Glenn Grimes, University of Missouri agricultural economist, points out, “if you want to remain profitable, pork production needs to remain below the 1.5 percent annual consumption growth rate.”
Without question, demand is setting the course — in the the short term and the long term.
Last year’s pork industry saw a 33 percent rally in hog prices, during a time when pork supplies increased 3 percent. That was unprecedented.
“Demand will be more important to prices than supply in the coming year,” says Hurt. “On the domestic front, pork demand is not expected to be as robust as in the next 12 months.”
Many other analysts agree. Exports will lead demand. U.S. pork exports grew by 27 percent in 2004. USDA forecasts for 2005 point to another 17 percent gain, which would be a 14th consecutive record. Today, about one in every eight pounds of U.S. pork is consumed in a foreign country. However, many analysts, including those at USDA, project a softer pork export market next year.
Also on the domestic scene, “packer and retail margins were narrow in 2004, resulting in high hog prices for producers,” reminds Hurt. But those margins likely will widen, which will have a negative impact on live-hog prices.
Then there’s the competing-meat factor. Chicken is already an appealing price alternative and supplies will be larger in 2006. Beef supplies also will trend higher.
Pork producers can look forward to continued, but more modest profits into 2006, notes Hurt. Be aware of future vulnerability as input costs rise and demand changes unfold. While percentages are important, a lot of numbers effect the waters on which profitability sails.