While high feed prices have kept pork producers in the red for nine months, a new Rabobank report sees the light at the end of the tunnel. Its U.S. Pork report predicts producers are likely to see profits again in 2009. Rabobank is a global financial services provider of institutional and retail banking and agricultural finance in key world markets.
“It has been suggested that the industry is in the middle of a perfect storm – excess hog supplies, record feed prices and initial concerns regarding the robustness of domestic demand,” says Fiona Boal, executive director of Rabobank's food and agribusiness research department.
Based on futures contract prices at the end of June, assuming non-feed costs remain constant, pork producers will not be able to achieve a breakeven scenario until May 2009. “A 1998-like collapse does not appear likely and those with the financial resources and expertise to survive the next 12 to 18 months should enjoy renewed profitability by the end of 2009,” Boal predicts.
U.S. demand for pork is holding up well and pork’s competitive retail price is expected to continue this summer. In addition, U.S. pork exports remain strong and provide vital support to the industry at a critical time. “U.S. pork exports have reached record levels for each of the last 16 years and are on pace to set new records in 2008,” says Boal.
Although current slaughter levels have reached record highs, it could even be worse. “During (the previous) period of industry profitability, the U.S. breeding herd increased by a little more than 3 percent, modest growth compared to past hog expansion phases," says Boal.
In an effort to reduce supply, sow slaughter during the first half of 2008 have been significantly higher than those for the same period in 2007, and it should accelerate. Small operations are closing and large producers are cutting their herds. “Given that the industry has only been losing money for the last nine months, a production response this quick is quite remarkable and illustrates the increased level of economic realism in the industry and the fact that production decisions are being made by fewer, larger players,” says Boal.
There are no guarantees, however. “Assuming that at some point hog and pork prices move higher, what may be even more concerning over the longer term is the volatility in the grain markets, says Boal. “It would equate to a significant price risk management challenge for all producers and users of grain.”