Glad to put 2008 and 2009 behind them, U.S. pork producers look to the year ahead for some business relief. “They lost about $20 per hog produced, which totaled nearly $5 billion in the two years," points out Chris Hurt, Purdue University Extension economist. "For them, 2010 represents more than just a new year, it brings improving prospects for business survival, a breath of fresh air in a financially drowning industry.”
The improving prospects are a result of both reductions in U.S. pork supplies and improving demand. Although USDA's December Hogs & Pigs Report showed lighter production cuts than were expected, and then are needed, at least the trends are in the right direction.The large losses did prompted a 3 percent reduction in the U.S. breeding herd in 2009, following a similar decline in 2008. Over the past two years, the U.S. breeding herd has dropped by 6 percent, Hurt notes.
In the 1990s and early in the 2000s, pork production was growing in areas outside of the traditional corn/hog belt. It appears now that the pork industry is consolidating back to the Midwest. During the past two years, North Carolina has led the breeding herd cuts with a 90,000-head or 9 percent decline. Texas had a 45,000-head reduction, representing 43 percent of its breeding herd. Other reductions on the geographic fringes include Utah with a 25,000-head or 25 percent reduction, and Arkansas with a 20,000-head or 24 percent cut. California, a relatively small pork production state, experienced a 65 percent drop in the breeding herd during the past two years.
Even with the breeding herd drop of 6 percent since 2008, pork production has actually increased due as the number of pigs per litter and heavier market weights have pushed it up by 4 percent. So, the breeding herd cuts have nearly been canceled out.
“U.S. consumers will notice much tighter pork supplies in 2010,” Hurt notes. “Pork production in 2010 is expected to be down 2 percent to 3 percent, but domestic availability on a per capita basis will drop by nearly 6 percent." That's because U.S. pork exports are expected to rise 10 percent, and the U.S. population will grow by about 1 percent.
USDA forecasts pork exports to rise to 4.6 billion pounds, which will represent 21 percent of U.S. production. This is up from about 4.2 billion pounds in 2009, representing just 18 percent of production.
In the end, it will mean an additional 3 percent to 4 percent of U.S. pork production will be shipped overseas and therefore will not be available to domestic consumers.
“A 6 percent decline in per capita availability is a relatively large supply reduction, but improved (domestic) demand also will be a critical factor in the drive to higher pork prices in 2010. Allow with export demand, domestic demand will improve as well, bolstered by the recovering U.S. economy and by the demise of the (Novel) H1N1 influenza virus as a daily front-page news story,” Hurt says.
So how high can pork prices go, and what about production costs? According to Hurt, first-quarter 2010 live-hog prices are expected to average in the high $40s per hundredweight. The second quarter will likely see the year's highest prices, averaging in the low $50s. Third-quarter prices are expected average near $50, with the final quarter landing in the mid-to-upper $40s. That puts the average for the year, near $50 on a live basis, or about $67 on a carcass basis.
“Unfortunately, production costs are expected to be near $50 to $51 per hundredweight for the year based on corn and soybean meal prices on Jan. 4,” Hurt notes. “The good news is that production costs include all costs, including full labor return and full building and equipment depreciation.The bottom line is that pork producers are not expected to go backwards financially in 2010.”
He adds that there is some hope that pork prices could be even higher than expected. “The lean hog futures market is somewhat more optimistic than the forecasts presented here." He points out further that when hog prices do turn around after a slump, history show they've greatly exceeded expectations. Still, vulnerabilities exist in terms of uncertainties over feed costs, the strength of the economic recovery and trade disputes that could still temper pork export growth.
“Margin hedging using lean-hog, corn and soybean meal futures should be considered by those who cannot accept the potential consequences of these vulnerabilities,” Hurt says.
Source: Purdue University