U.S. pork producers have been, for the most part, sitting on their hands regarding expansion as they enjoyed record-high hog prices this year. The reason, of course, has been concern over extremely high costs of production — concerns that have indeed been realized in the past week as both new-crop corn and new-crop soybean meal futures have hit contract life highs. Those increases as well as the expiration of the last of the summer Lean Hogs contracts on August 12 have put a decidedly negative tone to the outlook for pork producers for the next 12 months.

The top chart at right shows historic Iowa hog prices and costs of production as estimated by Iowa State University. The costs represent average Iowa farrow to finish operations and include a major adjustment to the production parameters beginning January 2010. That adjustment accounted for growing operations (basically going from a one-man business to a more modern 1200-sow farrow-to-finish organization) and changes to production efficiencies. It also put some feed cost weight on distillers dried grains with solubles (DDGS) to reflect the growing adoption of this ethanol by-product as a feed ingredient. The argument can be made that the weighting for DDGS is now too low as producers have used more and more of that product.

The chart also includes projections of costs and hog prices for the next 12 months and the picture is not pretty. Any 12-month out” projection had to get worse as this past summer progressed and record-high futures prices for June, July and August dropped out of the 12 month period and into the history portion of the chart. The prospect of a small average profit over the next 12 months, though, has turned into what appears to be substantial losses. The only profitable month on the chart is the month just completed. Returns are currently negative for every other month from now through July 2012 and the average loss over the time period is $14.60/hd.

Readers should note that yesterday’s warning that assuming hand-to-mouth cash transactions for packers lead to some potential discrepancies in estimated margins applies here as well. Many producers have done more hedging feed costs and hog prices this year than ever before. Some of that has been of their own making, some has been at the strong “urging” (and in some cases, requirement) of their lenders. Those producers likely had slightly LOWER returns than this model shows for this past summer since they would have sold fewer on the robust cash markets. But they likely have higher returns locked in for the coming year.

And we must add a warning that many very efficient hog operations achieve production efficiencies and capture economies of scale (even compared to the 1200-sow model) that put their costs $4 to $8/cwt. carcass ($8-$16/head) lower than this ISU model. So, while average Iowa farrow-to-finish operations face losses, these producers will be breaking even or, perhaps, earning small profits.

What does this mean for the breeding herd? We do not think it is changing much. The drop in sow slaughter in July was more a function of weather than of a shift to expansion. Anecdotal evidence suggests that sow death losses spiked higher during the heat wave and producers were no doubt reticent to ship sows in those conditions when the prospect of transport losses was much higher. Sow slaughter has moved back above year-ago levels the last three weeks for which we have data (the latest being August 14) and we suspect that the past two weeks will show further increases when they are published by USDA. Lower expected profits and $70/cwt.-plus sow prices — even $75/cwt.-plus prices last week — will get sows moving again. Does that mean the herd is contracting? We doubt it. These dimmed profit prospects are too new to be having a huge impact yet.

Further, Missouri’s gilt data showed the percentage of gilts in the slaughter mix was near record low at 45.1% last week. That series is pretty variable but the low number suggests that producers may be cashing in older sows and laying in new gilts at an even faster pace than in the past.