It has been three years or more since pork producers saw any black ink on their books, and now it is starting to flow with higher hog prices and more stability in the feed market. In fact there was excitement when prices reached the mid-$60 range earlier in May, but now with financial markets upset over the European debt issues, there may be cause to wonder if the heady times are nearing an end.

The global economy is again rearing its head as European investors are fleeing from the Euro to the Dollar. With the Dollar gaining strength, foreign currencies cannot buy as much and that has hurt exported US commodities, such as pork. While it may take the shine off pork, it will not cause prices to fall away from current levels.

Purdue economist Chris Hurt uses his newsletter to say that pork supplies are down, and that is the good news, since they will stay down for the foreseeable future. By the numbers, he says, 2010 production is down 4%, per capita availability is down 5%, per capita supplies will be down 8% this summer and down 3% for the balance of the year.

Good news for now yes, but is it followed by good or bad news? Hurt is concerned about higher retail prices for pork, because retailers have not increased their prices to consumers. And will good demand in a market with reduced supply, prices have to rise in the meat case. Since the first of the year, pork prices are a nickel less than they were at this time in 2009. At the University of Missouri, livestock economists Glenn Grimes and Ron Plain agree in their newsletter, “Domestic per capita pork usage in April was down 5% compared to a year earlier. Less consumption despite a lower deflated price means retail pork demand was down in April, 7% lower by our calculations.”

“So far, the retailer has been subsidizing the consumer, but what happens in a month or two when that ends?” Asks Hurt rhetorically. Grimes and Plain say the average price of pork in grocery stores in April was $2.919 per pound, only a half penny higher than both March and April of 2009, despite higher wholesale prices, “The average live price of 51-52% lean hogs sold in April was $57.43/cwt, up $5.00 from March and $14.60 higher than April 2009.”

Hurt says the retail margin is about 26 cents per pound, and most of that is going to the producer, and he says the consumer has not seen the true of the meat and when they do, what will happen? Will they remain cautious about the economy as the European debt issue continues to foster concern? Grimes and Plain say the financial ills of the economy are being felt at the Mercantile Exchange in the meat pit, “The turmoil in the financial markets spilled over into commodities this week and not in a positive way. The June lean hog futures contract ended the week at $81.54/cwt, down $2.01 from the previous Friday. The July contract settled at $82.27, down $1.55 for the week. August closed the week $1.18 lower at $82.32/cwt and October ended the week at $74.55/cwt.”

That would push many away from the meat case in times of higher priced product, particularly in times of higher unemployment. Hurt says as retail prices move higher this summer, consumers will back off their demand for pork, and live hog prices might drop a few dollars, back below $60 for the third quarter, and further back to near $50 for the end of the calendar year.

Hurt says he does not anticipate any indication of increased supply until next March will more hogs saved for the breeding supply. And at that time the lender may have some input into such expansion. Hurt says profits should be $21 per head for the year and $10 per head for 2011, and it will take both of those to erase the losses from the past two year. He’s recommending waiting until the fall and 2011 for hedging, and just taking cash margins now.

Summary:
Pork profitability has returned, but there is a potential for it to slip somewhat because of the retail price structure. Higher cash hog prices have provided money to producers, but the retail margins are also going to producers since retailers have not raised their prices paid by consumers. When that happens, there are questions about the consumer response, in the wake of the continued uncertain global economy. Producers should make profits with hogs through the end of the year, and slimmer margins are anticipated in 2011.

Source: Stu Ellis, University of Illinois