The nation’s pork producers, emboldened by a return to profit earlier this year, are edging toward herd expansion even as corn soars to 15-month highs, Purdue University economist Chris Hurt said.
Most producers made money the past six months as hog prices surged, and the general market tone suggests profits will continue through the summer of 2011, Hurt said in an Aug. 31 e-mail. “In other words, the longer-term outlook is favorable,” he said.
Additionally, sow slaughter has declined since July, said Hurt. “That is usually a hint that sows are being retained longer, and a potential proxy for expansion.”
U.S. sow slaughter totaled 53,076 head during the week ended Aug. 14, down from 56,029 the week ended July 31, according to USDA data.
Industry expansion, in the form of an increasing breeding herd, may show up in the USDA’s quarterly Hogs and Pigs report in December, and if not in that month, “for sure” in the March report, Hurt said.
Recent market signals indicate the “direction is to expand the breeding herd,” Hurt said.
On June 1, the number of pigs kept for breeding totaled 5.788 million head, the USDA said in a report earlier this summer. While the June 1 breeding herd was down 3 percent from the same date a year earlier, it was up 0.5 percent from a record low of 5.76 million March 1.
Pork producers returned to profitability around March after losing money much of the previous three years when feed costs soared and the recession and the H1N1 virus outbreak pinched demand. Producers cut herds as losses swelled, leading to this year’s hog price rally as meatpackers competed for smaller supplies.
The lag between a return to profit and an increase in pig births is typically about a year, Hurt said, meaning farrowings probably will post a rise compared with year-earlier levels by the second quarter of 2011.
“That means more hogs coming to market in the fourth quarter of 2011,” Hurt said.
The number of sows farrowing in the six months ending in November is expected to be down about 5 percent from a year earlier, the USDA said previously.
Several factors could trip up any expansion effort, analysts say. Banks may balk at financing expansion projects with pork producers only recently posting profits. Additionally, the economy’s recent struggles have stirred concern the U.S. may be slipping back into recession, which could hurt meat demand.
Further increases in corn prices may also give producers pause. Corn rallied the past two months amid expectations the U.S. crop won’t be as large as once predicted.
In today’s trading, corn futures for September delivery at the Chicago Board of Trade rose 7 ¾ cents to $4.32 ¼ a bushel, after touching $4.33, the highest for a nearby contract since June 2009, when prices reached $4.50.
Pork producers could absorb additional upside in corn costs and still make money because animal prices remain high, Hurt said.
On a live animal basis, producers’ cost of production during the fourth quarter is projected at $50 to $51 per hundred pounds, Hurt said. Earlier today, live hogs averaged $58.33 to $60.73 per hundredweight in major Midwest markets, according to the USDA.
Hurt estimates producers’ break-even corn price at $4.38 a bushel during the fourth quarter, $4.50 in the first quarter of 2011 and $5.41 in the second quarter of 2011.
However, the estimated break-even for corn drops to $3.60 in the 2011 fourth quarter, reflecting a likely decline in hog prices as animal supplies increase.
That outlook “suggests hog producers will be operating a loss once more if they expand pork production like the hog futures market believes they will,” Hurt said.
The bottom line, Hurt added, is livestock producers “have adjusted their herds and flocks downward such that they can pay $4 a bushel for corn.” Still, they “will have to be cautious about any expansion, given uncertainty about corn and feed prices,” he said.