'Flash drought' drying up pork profit potential

'Flash drought' drying up pork profit potential

While pork demand remains firm, producers' expansion plans could signal a return to red ink as feed prices linger near breakeven levels.

'Flash drought' drying up pork profit potential
PROFITABILITY has been a moving target in the livestock business these past few years, and no industry is proving that this year quite like the hog business.

While prospects for profits in 2014 seemed assured earlier this year, late-season dryness and sharp increases in feed prices in the short run have threatened what had been a sunny outlook.

Purdue University agricultural economist Chris Hurt warned late last month that as corn and soybean meal futures trended higher alongside temperatures and dryness in August, production costs increased roughly $5/cwt. While that doesn't necessarily mean that profits are out of the question next year, he cautioned that producers should examine their expansion plans pretty closely.

"This has not wiped out profit potential, but it should make hog producers more cautious about expansion," he said. "Expected margins have narrowed but not collapsed."

Hurt said producers can break even with hog prices above $59/cwt. Forecasts show fall and winter prices near $61/cwt., then rising to $65 in the second quarter of 2014 before settling near $62 in the latter half of the year (Figure 1).

Based on those projections, Hurt said producers would see profits of $3.50/cwt., or roughly $10 per head.

"The unexpected recent surge in feed prices might cause some preliminary expansion plans to be aborted and, therefore, increase the likelihood that lean hog futures prices also will rise some from current levels that are based on expectations of larger expansion," Hurt said.

Given ongoing concerns about how the U.S. corn and soybean crops will finish in light of what some have described as "flash drought" in key regions of the Corn Belt, both grain and livestock producers are holding their collective breath until the U.S. Department of Agriculture releases its September "Crop Production" report later this week.

While harvest pressure has tamped down corn prices somewhat as combines start rolling, there's a good deal of guesswork in the market, at least until harvest begins in the middle of the country.


Exponential gains

Hurt warned that even if feed prices trend lower with much larger crops than were harvested last year, pork producers should exercise caution relative to expansion plans, because even minor growth in the breeding herd could increase supplies such that the industry returns to red ink next fall.

"Expansion needs to be constrained to no more than a 3% increase in the breeding herd over the next year," he said. "A 2-3% breeding herd expansion would be expected to push the industry back to breakeven."

Hurt explained that a 2% increase in the breeding herd would yield a 4% expansion in hog production. The number of pigs per litter has been growing by an average of 1.8% over the past five years, and slaughter weights have increased as well.

One lingering question, relative to sow herd productivity, is the effect of porcine epidemic diarrhea virus on the weaned pig population. With 19 states now affected by the disease, the potential for keeping a lid on productivity is very real.

More will be known on that score Sept. 27, when USDA releases its "Hogs & Pigs" report.

Consultant Mike Brumm, in a blog for the Minnesota Pork Board, noted last month that gains in productivity over the past 20 years were largely due to producers' efforts to reduce non-productive female days, widespread adoption of artificial insemination and genetic advances in the number of live-born pigs per litter farrowed.

The average number of pigs weaned per live animal in the "Hogs & Pigs" report's "kept for breeding" category increased from 13.6 pigs in 1992-93 to 16.8 in 2002-03 and 20.3 in 2012-13. The number of pigs per litter increased from 10.0 in 1995 to 10.1 in 2002 and 11.8 in 2012.

Brumm also noted that the seasonal nature of pork production has decreased over the past 20 years. In 1992-93, production was more heavily concentrated from March to August, accounting for nearly 52% of production. On a quarterly basis, production now ranges from 24.6% to 25.5%, meaning that the quarterly shift in total production on a percentage basis is now less than 1%.


Market watch

'Flash drought' drying up pork profit potential
Shane Ellis at Iowa State University calculated that the average market hog sold in the U.S. during the month of July earned $13.08 per head in profit, marking the second profitable month in a row after 10 consecutive months of losses.

The average cost of production for hogs sold in July was $71.83/cwt. The cost of production has declined each month since hitting a record of $74.13/cwt. in January.

Cash hog prices firmed in the western Corn Belt over the past week, from a weighted average of $87.19 on Aug. 29 to $89.79 on Sept. 5. Prices were more or less steady in the eastern Corn Belt, dropping a penny on the week from Thursday to Thursday. The hog:corn ratio improved to 14.84, reflecting solid hog prices and cheaper corn.

Pork cutout values also held mostly steady, dropping 20 cents from last Friday. Loin prices gained 63 cents from Friday to Thursday, with a five-day average value of $96.61.

The recent heat wave has kept a lid on the weights of hogs coming to market (Figure 2), and that has allowed wholesale pork prices to remain strong in the face of seasonal tendencies.

Cattle prices, meanwhile, remained mostly steady in a holiday-shortened week. Trading was fairly limited across the country through last Thursday, with prices ranging from $122 to $125/cwt. on a live basis and from $193 to $196/cwt. on a dressed basis.

Slaughter was off fairly significantly from the previous week but, through Thursday, was actually 9,000 head larger than Labor Day week in 2012.

The Choice cutout was $195.86, up 15 cents from the previous week. The steer:corn ratio moved above 20 for the first time in many weeks as corn prices trended back toward $6/bu. in the cash market.

Chicken prices were mostly steady last Thursday in the face of light retail and foodservice demand. Prices for breasts, tenders and leg meat were trending lower for the week, although wing prices were steady. The Georgia dock price for broilers and fryers was $1.0625/lb., compared with 95.50 cents a year ago.

Broiler-type eggs set for the week ending Aug. 24 were up 5% from a year ago at 201 million eggs. Placements for the week tallied 164 million, up 1% from a year ago, while cumulative placements for the year totaled 5.61 billion, up 1% from last year.

Turkey prices were, likewise, mostly steady on fairly light trading. On a national basis, hens were in the 97 cents to $1.05/lb. range, and toms were 97 cents to $1.07/lb.

As with almost every other category of protein last week, egg prices were steady to weaker during the short trading week. Prices were 2 cents lower in New York, but regional prices were otherwise steady as market activity was fairly slow in most sectors.

Class III milk futures prices firmed up through Thursday, rising 20 cents from the previous Friday to settle at $18.03/cwt. Butter settled at $143.55/cwt. and fell sharply from the previous week's close of $146.00. Cheese prices gained 2 cents to reach $1.763/lb.

USDA released its latest "Dairy Products" report Aug. 1, noting that total cheese output in June was 914 million lb., up 1.4% from last year but down 3.9% from May 2013. Butter production fell sharply in June, down 13.8% from May, although still 2.7% larger than the previous year at 141 million lb.

Volume:85 Issue:36

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