U.S. pork and beef producers are creeping toward expansion but have yet to jump in with both feet, even after stronger prices restored profits this year, government data indicates.
Based on feed price ratios tracked by the USDA, pork and beef industry profits still aren’t high enough to trigger a herd-building phase, livestock analyst Steve Meyer said.
The feed price ratio for hogs averaged 18.3 during May, the highest for any month since September 2006, the USDA said in its monthly Agricultural Prices report May 28.
While May’s ratio was up from 16.6 in April and marked the seventh straight month-over-month increase, it’s still below 20, a level that typically signals breeding herd expansion, Meyer said.
For cattle, the ratio was 29.6 during May, unchanged from April but below 30, the level that suggests expansion. The April and May cattle ratios were the highest since September 2007.
Although feed price ratios have increased over the past two years, “they are just now getting back to levels that may drive expansion,” Meyer said in a report today.
Feed price ratios represent the number of bushels of corn paid for by 100 pounds of a live, slaughter-ready animal. The ratios are a proxy for profitability and have historically been useful in predicting when producers may start expanding or contracting herds, Meyer said.
The lack of expansion may reflect livestock producers’ concern over the U.S. economy. Producers are still smarting from more than two years of losses, after feed costs soared and the recession weakened meat demand. As a result, animal inventories have shrunk following widespread herd reductions.
Additionally, unemployment remains near a 27-year high, suggesting that consumers may continue to shun higher-priced foods, such as steaks and chops, economists say.
“Pork profitability has returned, but there is a potential for it to slip somewhat because of the retail price structure,” University of Illinois economist Stu Ellis said in a report last week.
Higher retail meat prices raise questions about “the consumer response, in the wake of the continued uncertain global economy,” Ellis said. “Producers should make profits with hogs through the end of the year, and slimmer margins are anticipated in 2011.”
Chris Hurt, a Purdue University agricultural economist, estimates pork producers will make a $21 per-head profit in 2010 and $10 per head in 2011. In 2008 and 2009, producers lost $17 and $24 per head, respectively.
“Clearly, it will take profits this year and next just to dig out from under the losses of the past two years,” Hurt said.
Pork producer profits reached $40 per head over the past month, Meyer noted, “but far more capital is now required to earn that margin.”
“Where a market hog could once be produced for around $100, that same animal now requires $130 to $140 to produce,” Meyer said.
Meanwhile, chicken and turkey producers appear to be closer to expansion than their beef and pork counterparts, Meyer said.
The broiler feed ratio reached 5.1 in May, the highest since August 2007, according to the USDA. A ratio above 6 “will put those businesses in a growth mode,” Meyer said.
“Poultry ratios are just now reaching expansion signals while beef and pork ratios are still not high enough to elicit higher output,” Meyer said.