While yesterday's USDA December Hogs & Pigs Report showed 2 percent reductions in the U.S. breeding herd, market hog and all hogs/pigs inventories, the question is, why weren't the cuts more severe?
After all, 2008 was a river of red ink for U.S. producers as feed and other input costs set records. For example, Iowa State University's Estimated Return Calculations for farrow-to-finish operations shows that November's losses at $45 per hog were the third worst on record, taking a back seat to only December 1998 at $64 per head and November 1998 at $54 per head. For the year, Iowa State's program estimates producers lost an average $21 per head — the second worst year ever for the U.S. pork industry. "That's more severe than we expected," notes John Lawrence, Iowa State agricultural economist.
So why don't the pig inventory numbers reflect more of a pull back in production plans?
Lawrence offers several prospects:
Those individual raising hogs in the United States today are "pretty entrenched in pork production," he notes.
Producers have had some hedging opportunities throughout the year, and into 2009.
Even though losses started as far back as October 2007, "they still have some equity in hand," says Lawrence.
U.S. producers are looking at the rest of the world's producers — Europe in general, the Danes in particular; Canada — and the challenges they're facing. "More U.S. producers are saying 'if we can weather the storm, we can position ourselves in the global market,'" adds Lawrence.
There's also something of the "new-horizon" factor. All commodity markets — grains, energy, hogs — are staring at unknown frontiers and new cycles. Sort of like what happened in the early 1970s and its dramatic changes, says Dale Durcholz, senior livestock analyst, AgriVisor Services, Bloomington, Ill. "We're all moving into a new environment, trying to figure out what are the new ground rules," he notes. "It's about managing through this time and looking ahead to what's on the other side, then trying to figure out 'what do I need to do to get there'."
Specific to U.S. pork producers, Lawrence offers this: "There's some long-term thinking that 'if I can hold together and expect meat prices to reach some new plateau that reflects a return given the new higher grain prices, then I can stay in the game'."