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Hurt, Chris

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WEEKLYOUTLOOKA joint publication of the Department of Agricultural Economics, College of Agriculture, Purdue University, West Lafayette, Indiana,and the Department of Agricultural and Consumer Economics, College of Agricultural, Consumer and Environmental Sciences,University of Illinois at Urbana-Champaign.STATE • COUNTY • LOCAL GROUPS • U.S. DEPARTMENT OF AGRICULTURE COOPERATINGThe Illinois and Indiana Cooperative Extension Services provide equal opportunities in programs and employment.NOVEMBER 20, 2000HOG EXPANSION ATTITUDES HAVE CHANGED“More pork is on the way.”  That was the call after the September Hogs and Pigs report indicatedthat farrowings would be up 1 percent this fall and 3 percent this winter.  However since theSeptember 1 survey of pork producers around the country, markets have become less encourag-ing.  In August the corn crop was pegged at nearly 10.4 billion bushels, with a soybean cropapproaching 3 billion bushels.  These huge crops were going to create the “mother” of all logisticproblems and new crop basis bids were at sub-basement levels.  Central Illinois cash corn bids inAugust were $1.45 per bushel with hi-pro meal at $150 per ton, and this was before the harvestpressure began.Meanwhile, hog prices were rocking along at $42 to $43, with some talking about the potential fora near record high hog-corn ratio by the fall harvest.  The huge crop had to go somewhere, andhogs appeared to be a reasonable direction.  Given these market signals, it is not surprising thathog producers felt some desire to expand.Now let’s fast forward to today.  The monster corn crop was a possibility in early August, but theheat, late season dryness, and lodging problems took care of 315 million bushels of the potentialsuch that the 2000 crop would even lose its status as the largest crop ever.  The 3 billion bushelsoybean crop vanished also, being trimmed by 212 million bushels itself.  As a consequence, thestorage shortness was never as severe as anticipated, and corn basis levels and futures bothrecovered.  Bids of $1.45 a bushel gave way to $1.90 per bushel and higher.  Soybean mealprices rose from $150 per ton in August to $175 on the realization of the smaller crop.What do these higher corn and meal prices mean to the costs of raising hogs?  My estimates arethat they raised the anticipated costs by about $3.33 per live hundredweight.  But there is more tothe story.  Hog prices also weakened more than many had anticipated during the late summer.Dropping from the low $40 in August, hog prices reached their fall lows in the low $30s in earlyNovember.  While the fall quarter will still likely average $37-$38 per hundredweight, the higherfeed costs will make the final quarter of 2000 a near breakeven period.The profit outlook brightens only marginally into the winter.  Higher feed, fuel, and interest costsnow all will contribute to higher costs and thus even with slightly higher hog prices there will benear breakeven returns for average costs producers.  The ray of hope remains for next spring andearly summer when higher hog prices are expected to boost hog prices back into the profitcolumn for a few months before the impacts of rising production hit the market late next summer.The profit outlook changed in a substantial way this fall and producers will likely respond with aU of I Extension Newsletter ServiceUniversity of Illinois  at Urbana Champaign1917 South Wright StreetChampaign IL 61820smaller expansion than had previously been anticipated.  Unfortunately there may be only smallimpacts on the size of farrowings this winter.  Those were largely being locked in when theSeptember survey was taken.  But the size of the expansion “follow through” that was expectednext spring and summer is where most of the impact could occur.  In fact it was this continuation ofexpansion that was the most worrisome for building excess supplies in the final quarter of 2001and early 2002 that had the ability to break the backs of producers once again.As we look ahead to the December report which will be released on December 28th, it remainslikely that the breeding herd will creep marginally above year-earlier levels at unchanged to 1percent higher.  As mentioned earlier, winter farrowings will still likely be up 2 percent to 3 percent,and spring farrowing intentions may be up in the same range instead of up 4 percent to 5 percentas previously anticipated.  What this all means is that hog margins will be tighter in the comingyear than had been anticipated, but that the loss period in late 2001 and 2002 may not be asdifficult as was thought back in August.Three additional thoughts are in order.  First it seems increasingly clear that hog margins aregoing to be narrow in the future.  A continuation of the hog cycle means there will be periods ofboth positive and negative margins, but the average margin is likely to be small, and the ability toearn that thin positive margin is dependent upon being a highly productive producer.Second, the total number of sows in the country is sufficient to provide the demand growth in thenext few years based upon productivity gains.  In essence, no new sows need to be added to thenational sow base.Finally, the eastern corn belt suffered a disproportionate reduction in their breeding herds after the1998-99 hog depression.  Now it appears there will be little opportunity for the region’s producersto strengthen their financial positions, or to rebuild and regain their historic importance in nationalproduction.Issued by Chris HurtExtension EconomistPurdue University

Hog Expansion Attitudes Have Changed

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