Southern States News

Pork industry facing twin horrors, says Purdue expert (03/24/08)

WEST LAFAYETTE, Ind. - Excessive pork production combined with feed price escalation has the North American pork industry on pace to suffer the most damaging financial year ever, said a Purdue University expert.

"We estimate losses of $27 per head on average for 2008 for farrow-to-finish operations and those taking the market risk," said Purdue Extension agriculture economist Chris Hurt. "That compares with the previous worst year of 1998, where our estimates showed an average loss of $15 per hog.

In the fourth quarter of 2007, pork supplies were up 10 percent and the excess supplies, which began last October, continue in 2008, Hurt said.

"The new year has brought no relief," he said. "Production has been up 11 percent through March 1, versus previous years' levels, and I don't see an end in sight."

Sow liquidation is in the planning stages, but Hurt said it's not yet showing up on the supply side and probably won't for another five to six months. Smithfield announced a reduction of 40,000-50,000 sows, and the Canadian government will subsidize liquidation of sows via a national buyout program, but producers have to keep the liquidized barns out of production for three years. This is expected to help reduce their breeding herd by up to 10 percent.

"We get over 9 percent of our hogs from Canada, so that will certainly help lighten supplies in the United States," Hurt said. "Unfortunately, it's going to be fall before we see the lightening of the Canadian supply of hogs.

"So this brings us back to other large companies and some of the independent family farms where they're at a point to reduce or liquidize their herds because their buildings are depreciated or the operator is at a comfortable age to retire and ready to get out of the hog business. We clearly have some independent hog producers that also own farmland and realize there's a new way to add value to their corn."

Hurt expects to see a transition in the reduction of this herd by 6 percent to 8 percent, if not an 8 percent to 10 percent reduction. Much of the reduction in pork supplies can't begin to occur until the fall of 2008 due to the production process, and it will be spring and summer of 2009 before hog prices are much better, Hurt said.

Hog prices in January and February of 2008 averaged near $40 per live hundredweight, with costs of production for farrow-to-finish operations estimated to be near $54. First-quarter losses are now anticipated to be about $34 per head after estimated losses of $19 per head for the final quarter of 2007.

"The poor outlook for losses will not change until we get a reduction in pork production in the United States," Hurt said. "We've got production costs currently above the mid fifties, and we are going to see some strength in the hog prices further into the spring.

"I think we'll be in the high forties and probably very low fifties for the summer as averages for hog prices. The problem is feed costs - the corn and soybean meal. The cost of production could push up nearly to $60 per hundredweight if we see these grain and soybean meal prices hold where the futures market suggests. So yes, we can get some strength in hog prices, but they can't catch up with the extreme costs for this year."

Last fall corn was close to $3 per bushel at the low end and now the price is closer to $5.50 per bushel, and soybeans have experienced similar market price volatility, he said.

"A pork producer could look back and say they got a signal that we were not going to have extremely high corn prices in the early fall of 2007, but we all have to recognize that those lower corn prices are not here now and clearly the futures markets for corn and soybean meal are showing we will have multiple years of these very high prices," Hurt said. "It's not just the 2007 crop, it's the '08 crop, it's the '09 crop and even extending into '10.

"This is a new reality. Perhaps we will not stay at these extreme prices, but the best anticipation of the markets at this point is that we are going to have very high corn and very high soybean meal. The industry for hogs must adjust."

Purdue News Release

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