The consensus out of USDA's June Hogs & Pigs Report is that more production cuts are needed in order to restore U.S. pork production to profitable levels. Modest reductions from last year's levels hovered in the 2 percent area for nearly all categories in the June report. See "U.S. Hog Inventory down 2 Percent."
"A big problem is feed costs," says Ron Plain, University of Missouri agricultural economist. "and we're not returning to $2-bushel corn," So production cuts are going to have to materialize. But who, when and to what degree those cuts will occur has remained in limbo.
"In the past few decades, small producers used to do the cutting," notes Plain, but their market share is no longer sufficient to make an impact. Further, producers running "small" hog operations also tend to be crop producers, so the hog-based financial pressure is not as hard on them as pork-only businesses. "They may not be making money on hogs, but their crops ease that pressure," notes Plain.
Still, something is going to have to give. "We'll end up relying on bankers to make the hard decision for producers," he adds. "There's not been enough voluntary cuts, and the red ink is deep enough that bankers will force reductions."
Bob Brown, an independent market analyst in Edmond, Okla., points out that today's pork production structure really doesn't allow for an operation to cutback due to the efficiencies and consequently higher production costs. That means "whole units have to be taken out of production, not just cutting numbers," he notes.
Producers are not alone in this dilemma. Brown points to pork's cutout value, which hit a six-year low this week. "This is June, we're supposed to have our highest cutout values," he notes.
The kill and cut margin is $5 per hundredweight lower than a year ago, says Brown. "Packers are hurting too. If packer margins were equal to 2008 levels, hog prices would be $5 lower than they are today. So they're essentially subsidizing the hog industry."
Demand n the export market and domestically is a huge problem in all of this, notes Victor Aideyan, senior risk management consultant with HIS Grain Commodities. "If there's no white knight in terms of new demand on the horizon, then the market will need to cut numbers."
And those cuts could include a packer. "If we're not only going to have to lose hog production, but a hog slaughterer to keep some of these other hog slaughterers in business," says Brown.