PORK producers can see "the promised land" of lower feed costs, which will lead to an extended period of profitability, according to Purdue University economist Chris Hurt.
While Hurt acknowledged that those lower costs aren't here yet, they're coming soon, as prospects for U.S. corn and soybean production indicate significantly lower cash prices come harvest.
"Feed cost reductions, if realized, will be of record magnitude," Hurt explained. "Estimated total costs for farrow-to-finish hog production will drop from $69 per live hundredweight in the second quarter of 2013 to about $56 in the final quarter of the year."
A $13 drop in costs would mark the largest such decline on record. Those improved figures are predicated on a likely $2/bu. drop in cash corn prices and a $130-per-ton drop in soybean meal prices.
Drought caused significant financial heartburn for pork producers last year as feed price increases came rapidly between mid-June and mid-July, offering producers little time to adjust breeding programs. That meant that a lot of pigs were reared on very expensive feed, and losses were the inevitable result.
"The drought put producers in a bind," Hurt said. "It resulted in large losses as producers' best alternative was to keep breeding and hope for more normal crop production and for lower feed prices. That hope is now much closer to reality and means the outlook for the next 12 months is the polar opposite of the past 12 months."
Losses of $21 per head during the past 12 months are expected to give way to projected profits of $16 per head through the first half of 2014. Hurt noted that the June "Hogs & Pigs" report showed that producers, while perhaps gearing up for expansion in the future, are keeping those plans close to the vest in the short run.
"The size of the spring pig crop was unchanged from the previous year, reflecting a status-quo attitude in the industry," he continued. "Summer farrowing intentions were also unchanged, and fall farrowing intentions were up slightly."
Hurt expects that lower feed costs and increased profitability will most likely lead to a 1-3% expansion over the coming year, if corn prices remain under $5.50/bu. The further prices go below $5.50, the greater the incentive to expand will become.
Looking at DDGS
Soybean meal pricing has gotten more attention lately as tight soybean supplies, unabated demand and a relatively strong crush have all yielded fairly resilient prices. The June crush tallied 119.05 million bu., down 3.5 million bu. from May.
While the soybean crush was significantly smaller than the 134 million bu. processed during the same month last year, traders had only expected a total of 115 million to 177 million bu. because supplies are extremely tight.
With soybean meal prices hovering near record levels, Rice Dairy feed grains analyst Jerry Gidel encouraged dairy and livestock producers to look at dried distillers grains plus solubles (DDGS) as a more affordable option.
With ethanol production ramping up in recent weeks, the availability of DDGS is much better than it was in the latter half of 2012 and the early months of 2013. Gidel said cost and availability make DDGS a much more profit-friendly alternative to soybean meal for feeders.
University of Illinois economists Darrel Good and Scott Irwin examined the pricing of DDGS last week and concluded that DDGS prices are primarily a function of corn and soybean meal prices, reflecting the value of the energy and protein content of DDGS.
"Not surprisingly, our simple model still leaves substantial variation in DDGS prices to be explained," they reported. "For example, DDGS prices were high relative to both corn and soybean meal for much of the last year-and-a-half. With the ongoing development of export markets for distiller grains, considerable efforts to optimize distiller grains in feed rations and the rapid increase in corn oil extraction from distiller grains, the pricing of distiller grains will remain an interesting topic."