Hog Outlook Turns Positive for 2006

Lower anticipated feed prices and stronger late-summer hog prices have combined to provide a more positive long-term outlook for pork producers, says Chris Hurt, Purdue University Extension marketing specialist.

“This may finally set in motion a U.S. expansion,” he says. “However, even with expansion getting underway this fall and winter, the additional market supplies are not expected to show up until the fall of 2006. This means that next year should be profitable for producers.”

Maybe the biggest positive news for producers came Aug. 12 with the Agriculture Department’s August Crop Production report. “That report suggested that the nation’s corn crop would be above 10 billion bu., providing sufficient stocks with no need to ration usage.

“Soybean production was viewed as barely sufficient to meet upcoming usage with only modestly higher prices than for last year’s crop. Final yields will still be important for meal prices. The reduction in prices from mid-July highs to Aug. 30 is over 50 cents/bu. for corn and about $55/ton for soybean meal.”

Hurt says the impact on expected cost of production will be a decline of $4-5/cwt. That would place cost of production at around $40/cwt. and live hog prices over the next year averaging $45-47.

“Pork supplies have remained moderate this summer as well,” he says. “After the USDA’s June Hogs and Pigs report, which showed no expansion, some felt more hogs would actually show up in the slaughter mix after a year of very good profits. That has not been the case as summer slaughter numbers have been up only modestly and very close to the inventory numbers in the June report.”

Demand has also rebounded. Exports are up, representing 13% of domestic production. “Part of the continued strength in exports is related to U.S. beef export restrictions,” explains Hurt. “At this time, there seems to be no resolution in sight with the Japanese on Mad Cow Disease testing, suggesting that pork’s strong export pace will continue.”

Lean hog futures for October, December and February 2006 contracts provide pricing opportunities. Contracts for April-August 2006 suggest a hog buildup, meaning more pigs will have to be born this fall and winter, he points out. Indications so far are that farrowings will be only slightly larger.

Hurt says this logic dictates producers take three marketing steps:

  • Forward price some hogs for the September-February period;
  • Remain open or buy put options for hogs that will be marketed after next February, and
  • With corn looking cheap this fall, own and store as much corn as possible at harvest.
TAGS: Marketing