Iowa Farmer Today
11-18-06
Slow expansion keeps prices in the pink
By Jeff DeYoung, Iowa Farmer Today
IONIA -- Leon Sheets says the past three years have been very good for the U.S.
pork industry.
“I believe we’ve had 33 consecutive months of profitability, and our export market
continues to grow,” says the Chickasaw County producer.
“But, we all agree it’s going to get a little tougher.”
Sheets, who runs a farrow-to-finish operation in Northeast Iowa, also is the
northeast regional director and vice president of market development for the Iowa
Pork Producers Association.
He says the recent hike in corn prices will put a dent in a hog producer’s bottom
line.
“I’m a net purchaser of corn, and we’re all aware corn is going to cost us more,”
Sheets says. “Not only that, but the ethanol industry is going to be a real
competitor for corn with more plants coming into production.”
Traditionally, the hog industry has ramped up numbers when faced with a
prolonged period of profitability. That has not happened, says John Lawrence,
ISU Extension livestock marketing economist.
Also, slower growth in the hog industry could mean less time in red ink, he adds.
“Live hog prices are holding together better than expected because we did not
get as much expansion as we had thought, and carcass weights have been
reasonable,” Lawrence says.
“We also have to take a look at the North American herd. While we have grown
some in the U.S., Canada is cutting back on numbers, and that has helped
prices.”
He says the recent USDA Hogs and Pigs Report in late September indicated the
breeding herd was 1.8 percent higher than it was in 2005.
“That’s a big number, but at the same time, numbers in Canada appear to be
down,” Lawrence says, adding the report also indicated U.S. farrowing intentions
this fall were lower than 2005 figures.
“That seems a bit inconsistent with the growth they are reporting.”
Prices for the second quarter of 2007 are forecast to be in the high-$40s, he
notes.
“Usually, when we have high feed prices, we eventually have high hog prices, but
it usually takes about six quarters for that to occur. It’s going to take some time to
get those hog prices higher.”
With cash corn well over $3 per bushel, Lawrence says break-evens for
producers are in the mid-$40s.
“We should be getting close to that figure on a live basis pretty soon, to the point
where we could even see some red ink this winter.”
For every $1/bu. increase in corn, Lawrence says hog producers lose about $5
per hundredweight. He says break-evens should be about $45/cwt.
By the end of the year, Lawrence says estimated prices will fall into the lower$40s sometime this month.
A year from now, Lawrence believes live hog prices will be similar to what the
market is paying right now.
“Part of that depends on what happens in Canada,” he says. “Hog supplies are
going to be a little larger, but weights should be moderate because of the higher
feed costs.”
By 2008, Lawrence expects there will be some reduction in the U.S. hog
inventory.
“I think we’ll see some red ink by Labor Day of next year, although there will be
some periods of profitability,” he says. “It’s going to be enough to suppress any
growth and could even force some liquidation.”
Sheets believes producer profitability could depend on how they make use of
ethanol co-products, such as dried distillers grain solubles (DDGS).
“You can replace some of the corn with the dried product, and you can do it
economically, but we need to make sure meat quality is staying right where it’s
at,” he says.
“If we change our nutrition program, is that affecting meat quality?”
Sheets also wonders about the growing number of Canadian pigs making their
way across the border.
“It’s no secret that some of the plants in Canada are having some financial
issues, and I’m hearing some Canadian producers are retaining ownership of
their pigs here in the U.S.,” he says.
“You have to wonder how much we will be picking up from Canada.”
Sheets also believes the U.S. pork industry has grown more than some think. He
says it’s important for producers to take advantage of any pricing opportunity,
whether it’s hogs or feed.
“I’m usually booked in on soybean meal prices, and I use the futures for the
hogs, although I do have a fair number sold in a long-term agreement with a
processor,” he says.
“I’ve got some hedges going with the futures market now, and I think it’s very
important that we all pay attention to what is going on. You have to be ready
when an opportunity is there.”