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Hog Producers Sink Into More Red Ink

H1N1 flu crisis and rising feed prices have combined to sink the pork industry in red ink, dating back to the fall of 2007

The H1N1 flu crisis and rising feed prices have combined to sink the pork industry in red ink, dating back to the fall of 2007.

“While recovery in hog prices is expected as the world tries to return to more normal consumption, the financial stress may be nearing a breaking point for some producers,” suggests Chris Hurt, Purdue University agricultural economist.

Hog prices were set to rise in April 2009, only to be derailed by the April 24 announcement of a human flu outbreak that the media wrongly dubbed “swine flu.”

“Lean carcass values closed at $61 on April 24, but just seven trading days later, prices dropped by $10,” Hurt says.

World health organizations were fairly quick in responding to this misnamed disease threat. But significant damage had been done to the pork industry. The most lasting damage could be to the export market, which has been absorbing a record 20% of production, he says.

The drop in exports and the uncertainty of consumers at grocery stores and restaurants combined to produce a logjam of pork in the wholesale market. Wholesale prices dropped about 7%, but live hog prices dipped by 17%.

For a few days in mid-May, carcass prices actually moved higher than their April 24 benchmark.

“But these prices were viewed as too optimistic. As of May 22, carcass prices were down 8% from April 24,” Hurt notes.

Rising feed prices have added another threat to profitability. From April 24 to May 22, corn futures rose by $.45/bu. and July soybean meal futures climbed by $57/ton.

“On April 24, hog producers were losing about $4/head. Now that number is about $25/head,” Hurt says.

The depressed hog economy has weakened most everyone in the industry and added more uncertainty to the future than usual, he says.

Hurt expects U.S. consumers to return to more normal pork buying patterns, but foreign buyers may take longer to return to normal buying patterns.
Production costs are expected to exceed hog prices through the first quarter of 2010, he predicts.

Hurt has forecasted prices to average in the low $50s in the third quarter, then drop to the mid-to-high $40s to finish out the year. Prices are expected to reach the mid-$50s during the spring and summer of 2010.

“With current futures prices for corn and soybean meal, the cost of producing pork is estimated at about $50/head and moving higher to about $52/head this summer,” Hurt says.

“Losses for the last half of this year are estimated at $7/head. For the entire year, losses would be $12/head, compared with $17/head in 2008,” he notes.