Purdue University Extension Marketing Specialist Chris Hurt says 2008 may be the worst financial year for pork producers since the infamous 1998.
“All you have to say to a pork producer is ‘1998’ and the most jovial fellow will turn red with rage, or drop his shoulders in a feeling of helplessness. Unfortunately, those emotions may be relived as 2008 may replace 1998 as the worst financial year for pork producers in modern history,” he predicts.
“The number one culprit is high feed costs and the second is too many hogs. The current unrelenting climb of corn and soybean meal prices may drive 2008 costs to the highest annual level ever. In addition, there continues to be more slaughter hogs than accounted for in USDA inventory reports, with no signs of moderation,” says Hurt.
Slaughter forecasts at the start of the fourth quarter called for 4.5% more hogs, but actual slaughter numbers almost doubled to 9%, Hurt explains. The source of the extra hogs remains a mystery.
“USDA increased last spring’s farrowings somewhat, but there were still nearly 3% unexplained slaughter hogs,” he says. “The great worry is that there may still be more hogs than USDA has counted in the December update.
“The December USDA inventory count indicated that slaughter would rise by about 4% for the first five months of the year. If USDA has undercounted, slaughter could be 6-7% higher. USDA indicated that the breeding herd was up by just 1% and that winter farrowings would rise by 2% and spring farrowings by 1%,” says Hurt.
With annual production rising about 3%, that’s too much pork to sell at profitable prices, he reasons.
Hurt forecasts live hog prices will average $46.30 in 2008, down from $47.10 in 2007, and the lowest in five years. Prices are expected to average in the very low $40s in the first quarter, rise to the high $40s for the second and third quarters, then finish the year in the mid-$40s averages.
Corn and soybean meal futures prices appear headed for record highs this year, resulting in record high annual costs for pork producers.
“While live hog prices are expected to average $46.30 for the year, costs of production are estimated at $55.60, based on futures for corn and soybean meal on Jan. 4, 2008 and adjusted to cash purchase levels,” says Hurt. “These estimates suggest a loss of about $9.30/cwt., or nearly $25/head on average for the year.”
That figure would exceed estimated losses in 1998 of $6.78/cwt. live weight.
The previous record high for cost of production was an estimated $48.93 in 1996.
Obviously, getting through 2008 won’t be easy, according to Hurt.
“Producers may want to base their strategies on a ‘survival mode’ for 2008,” he suggests. “If they can get through 2008, hog prices will likely recover in the spring or summer of 2009.”
Hurt urges the pork industry to move quickly to stimulate demand. “Retail pork prices have continued to move upward. Retailers need to be encouraged to lower pork prices by being reassured that wholesale pork prices will remain low in coming months. Foreign buyers need to be encouraged to increase purchases at this time of low-priced wholesale cuts. A special effort needs to move forward with China to resolve issues that may be constraining their purchases.”
To shave production costs, producers need to take several steps:
- Cut market weights to optimum levels.
- Reexamine feed efficiency, starting with feeder adjustment.
- Cull inefficient animals; and
- Reduce the breeding herd by about 3-5%.
Hurt says the process of trimming the breeding herd has likely started and will continue through the first half of the year.“They say it is always darkest before the dawn, but the dawn will not be in sight until pork producers reduce production to better align with this new high-cost era,” Hurt emphasizes.