The latest swine inventory count from USDA indicates that actual breeding herd cuts will drop pork production more than had been anticipated. Tight supplies will be complemented by much stronger demand as the U.S. economy recovers and continued pork export expansion.
“This means robust profits will return for producers,” says Chris Hurt, Purdue University Extension economist. Profits are forecast at about $18 per head this year, compared to an average loss of $20 per head in 2008 and 2009.
The March 1 breeding herd fell 4 percent from 2009’s inventory, totaling a 232,000-head reduction.
“Most startling was the further collapse of the North Carolina herd,” Hurt notes. “That herd dropped 50,000 head last December and lost an additional 50,000 head in the last three months.” He says the cuts likely reflect large integrators’ decision to reduce herds further, as well as the bankruptcy and liquidation of Coharie’s 30,000 sows last November.
“Given continued environmental concerns surrounding hog production in the state, this may signal a longer-term decline in hog populations there,” Hurt adds. “The smaller breeding herd means farrowings will be down about 4 percent this spring and about 3 percent this summer. Pork production is now expected to drop by about 3 percent for the year.”
If consumers want pork in 2010, they will have to pay up. While pork production will be down about 3 percent, the amount of pork per person available in the United States will drop more sharply, for a total decline of about 5 percent. That’s because USDA expects pork exports to expand by 8 percent, which pulls product off the domestic market. Rising U.S. incomes mean there will be more competition for those limited pork supplies. Beef will present less competition as its supplies are expected to decline by 2 percent as well. This should give rise to sharply higher retail prices of pork, especially this summer and fall.
First-quarter live-hog prices have averaged about $50.50 per hundredweight basis for 51 percent to 52 percent lean carcasses. Prices are expected to move sharply higher over the next two months and could move into the low $60 for daily highs in late spring and summer. Quarterly averages are expected in the mid-to-high $50s for both the second and third quarters, followed by very low $50s for the fall and winter quarters.
“The outlook for lower feed costs is another important factor leading to those glorious profits,” Hurt says. “The pork industry has finally reduced the herd to a level that can support $3.50 per bushel corn. Total production costs for farrow-to-finish units in 2010 are estimated at about $47 (per hundredweight), down from $54 in 2008 and $50 in 2009. There is considerable optimism that the entire animal sector is now moving into a period of better equilibrium between feed prices and animal product prices. This equilibrium has been reached by severe losses that resulted in reductions in animal production and by slowing growth in demand to use crops for biofuels, increasing crop yields, and a growing crop acreage base as some CRP land comes back into production.”
Pork producers’ profits are expected to peak this spring and summer at about $25 to $30 per head, moderate seasonally to around $10 per head in the late fall and winter, and average around $18 per head for all of 2010. Early projections are for 2011 to be favorable as well.
Given this rosy outlook, should producers begin expansion? Hurt says, most will say “no.”
“I cannot remember a time when there have been so many possible negative events from outside the pork industry that should make producers cautious,” he says. “We can start with traditional environmental concerns that include odor and water. But that has now been extended to potential negative implications of animal production if climate or carbon legislation moves forward.”
He then points to the Humane Society of the United States who is asking voters to change management practices on animal farms. “There is the small family farms initiative that is anti-commercial agriculture. This is certainly being reinforced by the Department of Justice now looking more closely into large-scale commercial agriculture,” Hurt notes. “In addition, there are advocates for local production, often associated with small-scale production. Groups continue to hammer on the human health impacts of animal product consumption and U.S. policy in recent years has strongly favored using crops for biofuels rather than food.”
Finally, the reality is that most lenders won’t want to extend credit for expansion until balance sheets improve. “So, let’s follow the lenders’ lead and give the pork industry a year to get back on its financial feet, and give the world a little more time to sort out how important food is compared to fuel,” Hurt concludes.
Source: University of Illinois