The Type A H1N1 influenza virus and rising feed prices have extended the challenges facing the U.S. pork industry, continuing the trend of "red ink" dating back to fall 2007.
"While recovery in hog prices is expected as the world tries to return to more normal consumption, the financial stress may be near a breaking point for some producers," says Chris Hurt, Purdue University economist.
By late April, hog prices were poised to turn upward. Then on the April 24 came the first word of a new influenza strain infecting humans. While it's well known that the media began calling it “swine flu,” which created turmoil for the pork industry and confusion for consumers, including export partners.
"Lean carcass values closed that Friday, April 24, at $61, but just seven trading days later prices dropped by $10," notes Hurt.
World health representatives and the media were quick to respond to pork producers’ outcry regarding how a simple name could damage their industry.
"However, much damage was done. The longest lasting damage will likely be in the export markets which had been strong with a record 20 percent of U.S. production headed for foreign markets in 2008," he adds.
Hurt says in the domestic market, pork buyers for grocery stores and restaurants were being cautious as they weren't sure how consumers would react. This, in combination with reduced exports, caused pork to backup in the wholesale market. Wholesale prices dropped about 7 percent, but farm-level hog prices dropped by 17 percent.
In mid-May, for a few days, carcass prices actually moved higher than their April 24 benchmark. "But those prices were viewed as too optimistic. As of May 22 carcass prices were down 8 percent from April 24," says Hurt.
Rising feed prices have also been a growing threat to profitability. From April 24 to May 22, July corn futures rose by 45 cents per bushel and July soybean meal futures by $57 per ton.
"On April 24, pork producers were losing about $5 per head. Now, that number is about $25 per head," he adds. "Most everyone in the industry has been financially weakened and the outlook is more uncertain than usual."
In the weeks ahead, pork prices should recover as U.S. consumers return to more normal buying patterns. World consumers who, in the first quarter of 2009, had already reduced their purchases from the United States will probably take longer to return to normal buying patterns.
Live-hog prices in the second quarter are expected to average in the mid $40s per hundredweight. Prices should recover in June with prices moving up to the very high $40s and low $50s, says Hurt. Prices are expected to average in the very low $50s in the third quarter and then finish the year in the mid-to higher $40s. In 2010, prices are expected to continue to improve in the spring and summer at the mid $50s per hundredweight.
"With current futures prices for corn and soybean meal, the costs of producing pork is estimated at about $50 per head and moving higher to about $52 this summer," notes Hurt. Unfortunately, those costs are higher than hog prices are expected to be for the rest of this year and into first-quarter 2010.
"Losses for the last-half of this year are estimated at $7 per head. For the entire year of 2009, losses would be $12 per head compared with $17 per head of estimated loss in 2008," he concludes.