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Hurt, Chris

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HOG PRODUCERS SHOW LITTLE SIGN OF RETREATAPRIL 2007 Chris Hurt 2007 –  NO. 2Hog producers reported in the latest USDAupdate that they increased the size of thebreeding herd by 1 percent. This meanspork production will continue to increase byabout 2 percent in 2007, and establish theeighth consecutive year of record porkproduction.  All in all, pork producers seemto have ignored, at least so far, the massiveincrease in costs. Production in 2007 is expected to be 21.4billion pounds, an increase of 1.8 percentover last year=s record production.  Thenumber of head slaughtered is expected torise by over 2 percent for the year, butweights are expected to be down about .4percent due to high feed prices.Growth in exports is expected to slow thisyear, but still be up 5 percent.  This rate ofgrowth is a considerable slow down fromthe 75 percent increase in exports in overthe three previous years. Liveweight prices are expected to averagenear $48 for 2007.  This is slightly higherthan the $47.30 of 2006.  The big change,however, is cost of production.  In 2006,estimated cost for farrow-to-finishoperations was about $40.40 and this yearit is $47.50.  This means the year isexpected to be near breakeven for hogproducers with almost all the change inproducers= bottom lines related to higherfeed costs.Lean hog futures are expecting higherprices than forecasts by our models, andare provid ing prof i table hedgingopportunities for 2007.  Producers shouldseriously consider both covering cornpurchases and pricing lean hogs if they cangenerate an expected profit from doing so.Hedging profits are available at this writing,but lean hog futures prices may alsoimprove somewhat more in the next four tofive weeks.The NumbersPork producers in the U.S. say they havecontinued to increase the size of thebreeding herd by about 1 percent.  Thenational breeding herd is 56,000 animalshigher than last year on March 1.  Most ofthe increase occurred in the Eastern CornBelt (ECB) where numbers are up 50,000head.  The increases by state in the ECBare: Illinois 20,000; Indiana 10,000;Michigan 10,000; and Ohio and Wisconsineach  5,000 head.  In the Western CornBelt, Iowa=s herd was down 20,000 head,but was offset by a similar increase inMinnesota.  The nation=s market herd wasup by a bit over 1 percent. Farrowing intentions are down modestly forthe spring quarter, but unchanged for thesummer quarter, perhaps finally indicatingsome slow down in the growth in pig crops.These numbers are shown in more detail inTable 1.Supplies and PricesThe table at the end of this section showsanticipated supplies and prices by quarter.Pork supplies in the remainder of 2007 areexpected to be up about 2 percent, but only1 percent higher in the first quarter of 2008. Prices for 51 to 52 percent lean carcasseson a liveweight basis are expected to benear $50 in the second and third quarterthis year and close to $46 for the lastquarter of 2007 and the first quarter of 2008.See Tables 2 through 5 for more details.Lean Times Coming for Producers?The break in corn prices after the March 30thProspective Plantings report was welcomedby hog producers, giving them added hopethat crop producers could provide enoughcorn for both fuel and feed for the 2007-08marketing year.  However, one week afterthe report, anticipated costs of productionare still expected to increase from around$47 per live hundredweight currently to near$49 by late 2007 and early 2008, see Figure1.  In the one week after the report corn pricesdropped sharp ly ,  but  recoveredsubstantially, while meal prices are littledifferent from their pre-report levels.  Inaddition, while the decline in corn prices forthe nearby corn futures contract was about20 cents, the decline in the more deferredcorn futures have been closer to 5 cents perbushel.  After all the excitement of theMarch 30 reports, estimated costs of hogproduction are down less than $.50 per livehundredweight over the coming 12 months.Depending on how weather affects yieldpotential, it now appears producers willhave a bit of profitability in the second andthird quarter this spring and summer,perhaps averaging about a $2. However,those positive returns will be surrendered inthe last quarter of 2007 and first quarter of2008, when margins are expected to turn toa loss of about $3 on average as shown inFigure 1.Lean Hog Futures More OptimisticLean hog futures as of the close of tradingon April 5, 2007 are more optimistic for thecoming year than are my forecasts, Figure2.  These represent the lean hog futures asof the close and the average Eastern CornBelt basis in the five years from 2002 to2006.  These are based on weeklyobservations.  The horizontal scalerepresents weeks from April of 2007through March of 2008. Fig 2: Futures Estimate of Live Hog Prices 4-5-07$42$44$46$48$50$52$54$56$58$601 2 3 4 1 2 3 4 5 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 5 1 2 3 4 1 2 3 4 1 2 3 4 5 1 2 3 4 1 2 3 4 1 2 34 5April07 M J J A S O N D J 08 F M12 Month Estimated Average = $50.71/cwt.The average is $50.71 compared to aforecast of $47.77 per live hundredweightfrom my computer models.  Futures areabout $3.00 more optimistic than modelforecasts.The Hogs and Pigs report released March30th provided inventory numbers that wereclose to expectations.  Yet, lean hog futuresin the first week after the report rose about$1.50 per hundredweight.  This strength didnot seem to be justified on the basis ofsmaller potential supply numbers comingfrom the report.  The strength in futuresseems to have been supported by twofactors: one, the start of a major seasonalincrease in hog prices and two, the reliefpork producers felt from the large potentialcorn acreage.  The ultimate questions willbe whether these higher lean hog prices willbecome reality. Implications for the IndustryWhy haven’t producers made moreadjustment to the nearly $7 per livehundredweight higher hog costs? There area few signs that adjustment is beginning.One sign is that carcass weights were downalmost 1 percent in the first quarter of 2007.Weights are expected to continue lower forthe rest of the year.  Secondly, while thebreeding herd is reported to be up 1percent, the actual rate of sow slaughterhas been up about 4 percent since last fall.In addition, farrowing intentions for thisspring are down fractionally.  Finally, theremay not have been enough time to seemuch reaction yet.  Hog producers were inAshell shock@ over high corn prices last falland, like other end users, hoped priceswould drop back down. Producers need to realize that national porksupplies will have to be reduced before theindustry will recover back to profitability.  Sofar, the cost increases have been absorbedby reductions in pork producers’ bankaccounts.  Assuming costs are now about$7 higher, U.S. pork producer returns will bereduced by about $2.0 billion in 2007 alone.How will that be recovered? Pork producerswill need to cut production and reduce thetotal supply of pork available. Once thesecuts are made, retail and farm level porkand hog prices will recover and the higherfeed costs will be transferred to consumers.Alternatively, since pork demand is growingmodestly, keeping pork production constantfor a period of time will also encourage retailand farm prices to rise.Current lean hog futures exceed myestimates of hog prices for the coming yearby about $3.00 per live hundredweight.  Inaddition, current futures for lean hogs, corn,and soybean meal would provide a modestlevel of profit based on our estimates ofcurrent costs.  Now would be a good time toadd to hog margins taken for the year.There is a strong seasonal tendency forlean hog futures prices to rise in April andMay. Taking some margins now andwaiting to take additional margins onpotential improvement in lean hog pricesover the next four weeks might beconsidered. Everyone has ideas on the future directionof corn prices.  But the sell-off in the post-March 30 period may be an opportunity toadd to corn feed coverage for the rest of2007.  From here on, it’s up to weather andhow rapidly the dramatic number of ethanolplants that are under construction come on-line. Volatility will be the key word for thenext two months.Issued By Chris HurtExtension  EconomistPurdue University2006 20072007 as % of 2006thousand head percentInventory  All hogs and pigs 60,326 61,103 101.3  Kept for breeding 6,025 6,081 100.9  Kept for market 54,301 55,022 101.3Market hogs by weight  Under 60 pounds 19,988 20,265 101.4  60-119 13,006 13,086 100.6  120-179 11,434 11,423 99.9  180 and over 9,874 10,248 103.8Sows farrowing   Sept 06 - Nov 06 2,900 2,912 100.4   Dec 06 - Feb 07 2,840 2,874 101.2   March 07 - May 071 2,927 2,913 99.5   June 07 - Aug 071 2,912 2,917 100.2Pigs saved per litter   Sept 06 - Nov 06 9.03 9.11 100.9   Dec 06 - Feb 07 9.03 9.08 100.6Pig crop   Sept 06 - Nov 06 26,187 26,501 101.2   Dec 06 - Feb 07 25,661 26,084 101.61 IntentionsNumber of Hogs April-JuneYears 60 to 179 Pounds Commercial Slaughter Ratio1990 19,811 20,263 102.31991 20,351 20,921 102.81992 21,645 22,202 102.61993 22,479 22,661 100.81994 22,620 22,965 101.51995 23,092 23,644 102.41996 22,075 22,201 100.61997 21,485 21,831 101.61998 23,565 23,628 100.31999 23,894 24,288 101.72000 22,961 23,105 100.62001 23,222 23,280 100.32002 24,086 24,280 100.82003 23,554 23,922 101.62004 24,159 24,803 102.72005 24,447 25,028 102.42006 24,440 24,835 101.62007 24,509 25,053 102.2ba Projectedb Mean of previous three yearsTable 1.  Hogs and Pigs in the United States, March 1Table 2.  U.S. Market Hogs Weighing 60 to 179 Pounds on March 1, and Commercial Slaughter in Calendar Quarter from April through June-----------thousand head---------Pigs/ Commercial RatiobYear Sows Farrow Pig Crop Litter Year Slaughter Slau/PigCrop1993 2,982 24,003 8.05 1994 22,965 95.71994 2,997 24,517 8.18 1995 23,644 96.51995 2,815 23,479 8.34 1996 22,201 94.61996 2,731 23,327 8.54 1997 21,831 93.61997 2,939 25,494 8.67 1998 23,628 92.71998 2,993 25,902 8.66 1999 24,288 93.81999 2,844 24,973 8.78 2000 23,105 92.52000 2,838 25,112 8.85 2001 23,280 92.72001 2,889 25,492 8.82 2002 24,280 95.22002 2,833 25,094 8.86 2003 23,922 95.32003 2,856 25,488 8.93 2004 24,803 97.32004 2,888 25,881 8.96 2005 25,028 96.72005 2,900 26,187 9.03 2006 24,835 94.82006 2,910 26,501 9.11 2007ab 25,674 96.993/94 2,885 23,368 8.10 1994 23,673 101.394/95 2,886 23,851 8.27 1995 23,264 97.595/96 2,735 23,054 8.43 1996 22,711 98.596/97 2,684 23,164 8.63 1997 22,679 97.997/98 2,929 25,480 8.70 1998 25,038 98.398/99 2,891 25,247 8.73 1999 24,960 98.999/00 2,798 24,522 8.76 2000 24,097 98.300/01 2,748 23,963 8.72 2001 23,635 98.601/02 2,835 24,857 8.77 2002 25,120 101.102/03 2,769 24,400 8.81 2003 24,747 101.403/04 2,836 25,105 8.85 2004 25,817 102.804/05 2,835 25,343 8.94 2005 25,515 100.705/06 2,840 25,661 9.03 2006 25,813 100.606/07 2,874 26,084 9.08 2007ab 26,562 101.81993 3,220 26,135 8.12 1993 24,574 94.01994 3,390 27,984 8.26 1994 26,315 94.11995 3,170 26,373 8.32 1995 25,197 95.51996 2,930 24,833 8.48 1996 23,832 96.01997 2,911 25,229 8.67 1997 25,143 99.71998 3,086 26,989 8.75 1998 27,586 102.21999 2,986 26,272 8.80 1999 26,723 101.72000 2,885 25,565 8.86 2000 25,714 100.62001 2,870 25,509 8.89 2001 26,470 103.82002 2,941 26,001 8.84 2002 26,715 102.72003 2,886 25,629 8.88 2003 27,608 107.72004 2,870 25,633 8.93 2004 27,192 106.12005 2,882 25,986 9.02 2005 27,485 105.82006 2,927 26,579 9.08 2006 27,980 105.32007a 2,913 26,625 9.14 2007ab 28,357 106.51993 2,972 24,041 8.09 1994 22,742 94.61994 3,107 25,547 8.22 1995 24,224 94.81995 2,976 24,813 8.34 1996 23,651 95.31996 2,718 23,244 8.55 1997 22,308 96.11997 2,946 25,696 8.72 1998 24,775 96.41998 3,054 26,634 8.72 1999 25,579 96.01999 2,920 25,862 8.86 2000 25,019 96.72000 2,889 25,548 8.84 2001 24,578 96.22001 2,878 25,539 8.87 2002 24,148 94.62002 2,883 25,725 8.92 2003 24,654 95.82003 2,918 25,974 8.90 2004 25,717 99.02004 2,905 26,162 9.01 2005 25,529 97.62005 2,918 26,449 9.06 2006 26,205 99.12006 2,912 26,518 9.11 2007 26,751 100.92007a 2,917 26,720 9.16 2008ab 26,814 100.4a Estimates b Last entry is the mean of previous three years including Canadian live imports (not shown).           Table 3.  U.S. Sow Farrowings and Pig Crop Compared to U.S. Commercial Slaughter (1,000 head) with 7-month Lag 1993 to 2007April-JuneMarch-May October-DecemberSeptember-NovemberJune-August January-MarchDecember-February July-SeptemberYear QuarterCommercialSlaughter(1,000 head)CarcassWeightPer HogPorkProduction (million #'s)PercentChangeYear-Ago1995 I 24,229 185.2 4,488 7.3II 23,646 185.8 4,394 3.6III 23,264 182.3 4,240 -2.0IV 25,198 186.1 4,690 -4.51996 I 23,650 185.6 4,389 -2.2II 22,201 184.9 4,104 -6.6III 22,711 182.4 4,143 -2.3IV 23,833 186.7 4,449 -5.11997 I 22,342 187.7 4,194 -4.4II 21,834 187.4 4,091 -0.3III 22,666 185.0 4,196 1.3IV 25,152 189.5 4,766 7.11998 I 24,776 189.2 4,688 11.8II 23,631 187.5 4,429 8.3III 25,038 184.7 4,625 10.2IV 27,523 188.9 5,239 9.91999 I 25,571 190.3 4,865 3.8II 24,292 190.6 4,630 4.5III 24,960 187.2 4,672 1.0IV 26,732 191.2 5,110 -2.52000 I 25,019 192.8 4,824 -0.8II 23,107 193.8 4,478 -3.3III 24,097 191.1 4,606 -1.4IV 25,714 194.8 5,010 -2.02001 I 24,578 195.5 4,805 -0.4II 23,280 195.3 4,546 1.5III 23,635 192.4 4,548 -1.3IV 26,470 197.9 5,239 4.62002 I 24,148 197.9 4,780 -0.5II 24,280 197.6 4,797 5.5III 25,120 192.4 4,832 6.2IV 26,715 196.7 5,255 0.32003 I 24,654 198.7 4,898 2.5II 23,922 198.2 4,741 -1.2III 24,747 194.2 4,807 -0.5IV 27,608 199.2 5,499 4.62004 I 25,717 199.5 5,130 4.7II 24,803 197.4 4,897 3.3III 25,817 195.5 5,046 5.0IV 27,192 199.9 5,435 -1.22005 I 25,529 201.2 5,136 0.1II 25,028 200.7 5,022 2.6III 25,515 195.9 4,999 -0.9IV 27,485 201.0 5,525 1.72006 I 26,205 203.6 5,335 3.9II 24,835 201.7 5,008 -0.3III 25,813 197.1 5,087 1.8IV 27,884 201.7 5,625 1.82007 Ip 26,751 201.7 5,397 1.2IIac 25,364 200.6 5,088 1.6IIIa 26,562 196.5 5,219 2.6IVa 28,357 201.7 5,720 1.72008 Ia 26,814 202.5 5,430 0.6a Projectedc Average of the two estimation methods (Table 2 and 3)p Preliminary     Table 4.  U.S. Commercial Slaughter, Carcass Weights, and Quarterly Pork Production 1995-2008Year QuarterBarrow and Gilts 6-Mkt Price ($/cwt)Lean Value (Live Price/74.5 yield) ($/carcass cwt)Retail Pork¢/carcass cwt1995 I $38.19 $51.26 191.6II $38.57 $51.77 190.2III $48.32 $64.86 195.6IV $42.86 $57.53 201.81996 I $45.33 $60.85 206.3II $54.84 $73.61 214.9III $57.96 $77.80 230.4IV $55.10 $73.96 231.91997 I $51.06 $68.54 231.0II $56.41 $75.72 229.7III $54.45 $73.09 234.5IV $43.69 $58.64 231.01998 I $34.74 $46.63 233.0II $39.42 $52.91 226.9III $33.95 $45.57 231.0IV $19.30 $25.91 226.91999 I $28.83 $38.70 235.8II $35.18 $47.22 238.4III $35.70 $47.92 246.4IV $36.29 $48.71 245.22000 I $41.14 $55.22 249.8II $50.43 $67.69 257.3III $46.43 $62.32 264.3IV $40.78 $54.74 261.32001 I $42.83 $57.49 262.5II $52.05 $69.87 267.0III $51.05 $68.52 275.0IV $37.30 $50.07 273.02002 I $39.43 $52.93 270.9II $34.99 $46.97 267.7III $33.86 $45.45 264.1IV $31.34 $42.07 260.22003 I $35.38 $47.49 260.9II $42.64 $57.23 262.2III $42.90 $57.58 269.8IV $36.89 $49.52 270.22004 I $44.18 $59.30 269.3II $54.91 $73.70 276.8III $56.58 $75.95 287.7IV $54.35 $72.95 282.82005 I $52.24 $70.12 282.9II $52.09 $69.92 286.7III $50.51 $67.80 282.9IV $45.54 $61.13 278.32006 I $42.63 $57.22 277.4II $48.45 $65.03 278.7III $51.83 $69.57 285.8IV $46.13 $61.92 281.02007 IP $46.11 $61.89 280.4IIAC $49.82 $66.87IIIC $49.60 $66.58IVC $45.72 $61.372008 IC $45.75 $61.41P Preliminary CEstimatedTable 5.  Actual and Forecast Live Hog Prices, Lean Carcass Prices, and Retail Pork PricesaA Predicted prices for 2007 (I) forward are made with two equations with theresults averaged.

Hog Producers Show Little Sign of Retreat

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