Aberdeen American News
March 7, 2006 Tuesday
South Dakota: FF; Pg. 78
Continued pork profits hinge on slow herd growth
After two very strong years of profitability, the pork industry's success in 2006 will be tied
to manageable growth in production and increased demand, both in the U.S. and export
markets. Experts say profits should continue during the first half of 2006 but urge
producers to manage their revenue risks for the latter part of the year.
After two outstanding years and 24 straight months of profitability _ the longest run of
consecutive profits since the early 1990s _ the big question for Midwest pork producers
in 2006 is "How much longer can the good fortune continue?"
"We've had two tremendous years back-to-back, and that's almost unheard of," says
Chuck Wirtz, a pork producer who farms near Whittemore in north central Iowa. "It
appears we are becoming a more mature industry in that producers as a group don't
seem to be wildly expanding."
That's important to the industry. In the past, periods of high profitability usually were
followed by an expansion in production that led to oversupply and a decline in prices.
But not during this run _ so far.
The U.S. Department of Agriculture's December 2005 Hogs & Pigs Report came in very
close to expectations. The USDA estimate for the total herd was 100.4 percent of yearearlier figures. The breeding herd was at 100.7 percent, with the market herd at 100.3
percent.
However, analysts Glenn Grimes and Ron Plain of the University of Missouri say that gilt
and sow slaughter data suggest the breeding herd is somewhat larger than the USDA
estimates. John Lawrence, an Iowa State University economist who tracks the
livestock industry, says pork producers should expect profitability to continue in 2006,
but at lower levels than in 2005. The price outlook begins to dim late in the year.
"We have record high supplies and the breeding herd is increasing, but only slightly,"
Lawrence says. "We're looking at low feed costs and strong demand, though demand is
slipping. Producers should see profits for the first three quarters, then prices around
breakeven during the last quarter of 2006."
FORECAST: 2006 Pork production, hog prices Quarter pork supply price forecast JanMar +0% $48-51
Apr-Jun +1% $49-52
Jul-Sep +1.5% $46-49
Oct-Dec +2.0% $39-44
2006 avg. +1.5% $45-48
Pork production is expected to rise steadily after the first quarter, with overall supplies
ending up about 1.5 percent higher than year-earlier figures. Hog prices (liveweight,
Iowa-southern Minnesota, per hundredweight) are expected to remain profitable through
the first three quarters of 2006, and then drop to about break-even during the fourth
quarter.
Source: Iowa State University Extension.
Exports helped hold 2005 prices
"Last year will be remembered as one of the most profitable years on record," according
to Steve Meyer, president of Paragon Economics in Adel, Iowa, and economics
consultant to the National Pork Board.
"When we began 2005, there was some fear of higher feed costs," Meyer says. "But that
didn't materialize. Now, with the near-record 2005 corn harvest and a two-billion-bushel
carryover, anticipated corn costs are about as low as they can go."
Hog prices were down slightly from the record 2004 levels, Meyer notes. "As we closed
out 2005 we were looking at carcass prices near $60, with liveweight prices around $45,"
he says. "Break-evens were running in the $38 to $39 range so there were still profits for
most producers in the fourth quarter, which traditionally is the least profitable."
On the other side of the equation, consumer demand for pork softened by 3 to 4 percent
in 2005 compared to year-earlier levels. Meyer attributes part of the decline to
consumers who turned away from high-protein, low-carbohydrate diets.
One important positive, however, is the continuing growth of the export market. Meyer
says U.S. pork exports last year were up nearly 30 percent _ and have increased more
than 50 percent from two years ago, and accounted for 13 percent of production.
International consumers' taste for U.S. pork was a major factor for the price strength in
2005, which marked the industry's 13th straight record export year.
Imports of foreign pork into America declined by about 10 percent in 2005, with most of
the drop coming out of Canada's sales. It's unlikely America's northern neighbor will
recover those sales quickly, in part because of a mid-December move by their
government, which imposed duties totaling $1.65 per bushel on U.S. corn. Officials
charged that subsidized American corn was being dumped on the market in Canada,
harming Canadian corn growers. "That move is going to discourage expansion of their
breeding herd and send feeder pigs down to the states," Meyer explains.
Risk Management Tool
Two relatively new tools are
available to pork producers to supplement traditional risk management practices. "Both
products are designed to help protect livestock prices," explains Joe Beland, an
insurance specialist with Farm Credit Services of America in Mason City, Iowa. "These
tools provide livestock producers with a viable alternative to manage downside price
risk." Livestock Risk Protection (LRP) is available to swine producers in most major pork
producing states, including Iowa, Nebraska and South Dakota. "The LRP product allows
pork producers to protect against a decline in hog prices below an established coverage
price," Beland says. "Producers can select from a variety of coverage levels and periods
of insurance that correspond with the time their market hogs would be sold."
The second product _ Livestock Gross Margin protection (LGM) _ is available only in
Iowa as a pilot program, Beland says.
"The LGM product provides protection against declining hog prices and/or an increase in
feed costs for a period no longer than six months," he explains. "LGM coverage has
been available since October 2004. It gives the producer a gross margin floor. Some of
our customers have used it regularly, so it appears to be working for them." For more
information on these new risk management tools, contact a local FCSAmerica office at
1-800-884-FARM.
Too much of a good thing?
The growth of export markets brings with it concerns about the impact of political
decisions on a single market, such as Japan, which consumes a significant amount of
American pork. "I worry that as exports become a bigger part of our total demand, we
are at risk from political decisions over which we have little control," says Iowa producer
Wirtz. "We need to keep enhancing domestic demand so we reduce that risk."
Economist Meyer said there's an ongoing debate among his colleagues about the
"optimum level" of exports. "Is 13 percent of production optimum?" he asks. "I'm not sure
it is. In my book, more is better. We just need to be sure that we have the broadest
possible distribution to minimize the impact of problems with any one country."
A major question for 2006 pork demand is a potential problem for another species _
poultry. "The bird flu issue and consumers' reaction to it have the potential to benefit
pork," Meyer says. "Consumers should realize there is little to no risk of contracting bird
flu from eating poultry. But if consumers, either foreign or domestic, shy away from
poultry, it could be a big positive for U.S. pork demand."
ISU's Lawrence sees a negative in that scenario, however. "For example, we export
more pounds of broilers than pork and beef combined," he notes, "and Russia and
eastern Europe are our largest broiler market. If they become afraid of poultry because
of bird flu, those American broilers will stay home. If that happens, chicken will become
cheap and be really stiff competition for pork and beef."
Lawrence doesn't see the resumption of beef imports to Japan as a major negative for
pork exporters. "There's no doubt we have increased pork exports to Japan in part
because of their ban on American beef due to the fears of BSE," he explains. "But pork
didn't take over the market on a one-for-one basis. For American beef to retake its share
will take some time, and how fast really depends on the Japanese consumers'
reactions."
Planning for the year ahead
Economists who follow the pork industry believe that 2006 will be a decent year for
producers. With ample supplies of corn and soybean meal, production costs should
remain low. Key factors to watch are the number of market hogs, carcass weights and
production efficiency. The latter _ measured by the number of pigs per sow per year _ is
experiencing the effects of a technological change, according to economist Meyer.
"Producers are switching from weaning at three weeks to four weeks. That allows more
time for the sow's reproductive system to recover," he explains. "This system appears to
provide a 2 to 3 percent net gain in productivity. You don't see the increased number of
pigs for a year, but they are out there."
Both Meyer and Lawrence believe that early 2006 will be a good time to make use of risk
management tools.
"Supplies are increasing and demand is slipping, so the scenario today is somewhat
riskier than it was 12 months ago," Lawrence says. Some tools are the traditional futures
and options markets, he adds, while others are newer, such as livestock revenue
protection or livestock gross margin insurance.
"Some of these programs are good opportunities to manage your risk for not a lot of
money," Meyer agrees. "In the first half of the year, look for pricing that makes a profit
and lock it in."