Although pork producers are enjoying profits again after suffering major losses during the recession, they should beware of corn prices before expanding their operations, according to Purdue University agricultural economist Chris Hurt.
From the 1999 crop to the 2005 crop when corn prices were hovering around $2 a bushel, many farmers found it more valuable to "walk corn to market" by feeding it to livestock. In recent years, however, corn prices have moved into the $4 range, a change that caused economic shock for the livestock industry.
"In the initial phases of the shock, feed prices moved up rapidly, but livestock producers couldn't pass those higher costs on to wholesale and retail prices for livestock products," said Hurt. "This resulted in a period of severe financial losses for livestock producers. Eventually, livestock supplies were reduced through cutbacks in herds, and the reduction ultimately resulted in higher livestock prices. Those higher prices can now cover the costs of feed again."
Live hog prices now are at $60 per hundredweight. Producer profits are not threatened at those prices, even with the increased corn prices. Hurt estimated that at current live hog prices, producers could afford to pay near $6 per bushel for corn.
Throughout the next year, hog prices are expected to come down slightly to a range of $53-$57 per hundredweight. Even at that rate producers could afford to pay slightly more than $5 a bushel for corn and still cover all costs. But the lean hog futures market anticipates breeding herd expansions in the fall of 2011, resulting in expanding pork supplies.
"By fall of 2011 futures are suggesting live prices closer to $48, so the break-even price pork producers could pay for corn drops down to about $3.75 per bushel," Hurt said. "So the pork industry has to remain cautious about expansion as even the modest expansions currently anticipated could push the price producers could pay for corn back below $4 a bushel."
Hurt said it's important to keep in mind that no one knows what the new normal will be for corn and other feed prices. U.S. and world corn production has maintained record high levels over the last couple of marketing years. But consumption also has been at record high levels, drawing down world grain stocks. Hurt suggested that record production likely can't continue.
So although the livestock industry has adjusted to $4 a bushel corn, producers need to keep in mind that corn and livestock prices are uncertain, Hurt said. Hog producers should be careful not to expand excessively as they consider pricing strategies to manage and potentially protect margins through the uncertainty.
Source: Ag Answers, An Ohio State Extension and Purdue Extension Partnership