The United States is producing more pork today, but less is available for U.S. consumers. How can that be?

"Pork exports grew by 68 percent in the first half of the year and imports fell by 15 percent, meaning that 1.1 billion pounds less pork was available for domestic consumers," says Chris Hurt, Purdue University agricultural economist. "By the second quarter, U.S. pork production was 9 percent higher, but U.S. consumers had 6 percent less pork available to them."

It is all part of what he termed a "remarkable year" for the U.S. pork industry. Saddled with extraordinary feed and energy prices and producing 20 percent more pork in the first half of the year, profits seemed a distant dream.

"But salvation has come in the form of international trade as cheap U.S. pork, subsidized with producer losses, and the weak dollar have made pork trade more important than exports are for the corn market," he adds.

Corn exports play a significant role in determining corn prices. Today, the pork trade has become the single most important factor in pork prices. 

"For the 2007/2008 marketing year, corn exports represented 19 percent of total corn use," he notes. "For 2008/2009, current USDA forecasts are for corn exports to represent only 16 percent. In contrast, USDA forecasts pork exports to represent 23 percent of U.S. production in 2008 and 22 percent in 2009."

The anticipated favorable pork trade and the potential for declining U.S. pork production into 2009 provide a bullish tilt on pork and live-hog prices. Per capita supplies available for U.S. consumers are expected to be down by 8 percent in the current quarter and down 10 percent in the fourth quarter.

For all of 2008, per capita pork supplies available to U.S. consumers will be down about 5 percent. Supplies will drop an additional 2 to 3 percent in 2009, making pork available to U.S. consumers relatively tight over the next 18 months.

"While trade has been the salvation of the pork industry in 2008, it also presents vulnerabilities as the U.S. industry has become dependent on these trade levels to continue," Hurt says.

"What might go wrong? The export surge has been led by China which in the past has had some unpredictable trade patterns. In the first half of 2008, increased pork shipments to China and Hong Kong represented 50 percent of the increased pork sales."

Hurt points to at least three concerns in regards to China.

First, China's internal pork production has been down due to "blue-ear" disease and to this year's earthquake. Estimates are that pork production has been down about 8 to 9 percent as a result.

"Pork price inflation was rapid in the winter and spring and gave the Chinese government strong incentives to buy cheap U.S. pork," Hurt notes.

"The second uncertainty might be called the 'Olympics effect.' China had strong incentives to import a large amount of pork in the months prior to the Olympics not only to keep consumer food price protest to a minimum, but also to have sufficient availability for their Olympic guests. If so, their pork purchases might be reduced in the post-Olympic period."

Finally, there is concern that this period of rapid purchases will not last because China is attempting to restore its own production. To the question of "who will feed China?" the Chinese government has generally responded "we will feed ourselves."

"China has primarily had a policy of self-sufficiency in food production in the last decade with the exception of soybeans and soy products," Hurt notes. "The question of whether China is making a fundamental shift away from self-sufficiency and toward some dependency on imported pork could have profound implications for the U.S. pork industry."

Russia provides another source of concern with regard to continued strong pork trade. Russia accounted for 13 percent of the increased pork exports in the first half of the year. Russia tends to be a "value shopper."

"They look for the lowest-priced source of animal protein," he adds. "As the price of U.S. pork rises, the attraction for Russia will be reduced."

As there has never been this large influence on pork price from international trade, there is little historical experience to evaluate the impact on hog prices. As a result, the futures market rather than a computer model is used to forecast prices for 51/52 percent lean carcasses.

Hurt looks for prices to drop from the low $60s to the high $50s into September. For the final quarter, he looks for prices to average in the mid-$50s, recovering to the high $50s for first quarter 2009.  Prices will peak in spring and summer next year, averaging in the mid-$60s.

"Prices then drop seasonally into the high $50s for the final quarter of 2009," Hurt predicts. "In 2009, all price records will fall, with the year's average in the low $60s and record-high prices for each quarter."

The question is, can pork producers compete for high corn prices?

"Yes, if these hog price forecasts hold, then pork producers will able to pay about $6.25 per bushel for corn in 2009 and still break even compared with only $4 in calendar years 2007 and 2008," Hurt contends. "But to get to this strong competitive position three conditions must occur:  Pork producers must continue to reduce farrowings somewhat; our foreign customers must continue to buy U.S. pork; and crude oil prices need to stay under $140 per barrel in order to compete with ethanol processors for corn."

Source: Purdue University