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Economists Expect Profits to Slow

The pork industry has enjoyed 27 consecutive months of profits but that winning streak may be coming to an end later this year. Producers have to look back to the mid-1970s to find a longer period of profitability when there were 33 consecutive months of positive returns. It has certainly been a welcome respite after being buffeted by the historically low hog prices of 1998-99. In fact, returns have

The pork industry has enjoyed 27 consecutive months of profits — but that winning streak may be coming to an end later this year.

Producers have to look back to the mid-1970s to find a longer period of profitability — when there were 33 consecutive months of positive returns.

It has certainly been a welcome respite after being buffeted by the historically low hog prices of 1998-99.

In fact, returns have been so profitable that Glenn Grimes, professor emeritus, University of Missouri, says financial leaders have told him that pork producer net worth is probably higher than it has ever been at any time in history.

Challenges Lie Ahead

That said, problems lie ahead for producers in two areas, Grimes reports in market outlook presentations at Pork Academy and at World Pork Expo in Des Moines, IA, last month.

“The problem we have now is we are growing faster than our demand growth,” says Grimes. “The pork industry is growing at 2.5% of production a year as far as efficiency is concerned, while demand is growing at a rate of 1.5% per year.”

Unfortunately, domestic demand for pork is relatively flat, and the outlook for growth is not very optimistic, adds Steve Meyer, president of Paragon Economics and a contributor to National Hog Farmer's weekly e-mail newsletter, North American Preview.

Meyer says the meat demand equation appears soft due to oversupply in all sectors.

USDA's 2006 forecast calls for 5.4% more beef, 3.1% more pork, 2.3% more chicken and 1.3% more turkey, resulting in consumers upping their total meat consumption of 240 lb./person/year by 3.1 lb. That meat glut is compounded by higher energy prices and rising interest rates, both reducing the amount of cash consumers can spend on meat.

Easter was tough for pork producers this year, as there were a couple of weeks when hogs sold for a loss. Large beef and chicken supplies and record-low chicken breast and leg prices really put a damper on pork demand this spring, Meyer points out.

A second problem is the change in the impact of supply on price, adds Grimes. Up until the mid-1990s, a 2-to-1 ratio applied — meaning that for every 1% increase in pork supply, there would be a 2% drop in the price of hogs.

That calculation has fluctuated wildly in the last 10 years, but it has averaged 5-6%, says Grimes. Therefore, “for every 1% increase in supply, there is a corresponding 5-6% change or drop in hog prices,” he says.

The level of U.S. pork production is becoming more stable, while market prices continue to be highly variable, as depicted in Figure 1.

And seasonal supply fluctuation is diminishing, but the level of fluctuation in prices is not, and is actually growing, he warns.

On top of those issues, preliminary estimates show that as of June 1, the U.S. breeding herd was up 1.8%, on top of a 1.4% projected increase on March 1, says Grimes. He says there are still reports of 175,000 to 250,000 sows being added to the industry in the next 12-18 months and, he emphasizes, that growth is not needed.

One plus to the production side, for the first time in a decade, is that Canada's sow inventory on April 1 was below a year earlier. If you combine current anticipated growth in the U.S. and Canadian pork industries, there is still just slight growth overall projected in sow inventories, Grimes notes.

Canada's sow herd reduction is due to much lower hog prices in 2006, the result of a strong Canadian dollar and weakening U.S. dollar, says Meyer. In 2002-2003, the U.S. dollar was worth about $1.60 Canadian. Since mid-April, the U.S. dollar is only worth about $1.15 Canadian.

Also, Canadian production has been buffeted much more severely by porcine circovirus-associated disease (PCVAD), he adds.

Exports Continue to Shine

A continuing bright spot for the industry is the amazing growth of pork exports. The United States exported 14% of its pork production for the first three months of this year, up 86% from the same period three years ago, and double the pork trade for the first quarter of 2002.

“The hog industry in 2006 is 15-16% larger than it would have been had the export market stayed at the 1986 level,” observes Grimes. “The United States went from being a net pork importer of over 7% in 1986-87 to over a 9% net exporter of pork in the first quarter of 2006.”

That milestone was achieved the first quarter of this year despite a 7% drop in pork exports to Japan, as the Asian country moved away a bit from pork to chicken, says Grimes.

But growth has been exceptional in other markets: Canada, up 9-10%; Mexico, up 38%; mainland China and Hong Kong, up about 50%; Taiwan, up 70%; South Korea, up 69%; the Caribbean, up about 30%; and Russia, up 148%.

Grimes and Meyer agree that bovine spongiform encephalopathy (BSE) concerns fueled some of that pork export growth earlier on, just as fears of the Asian flu are helping propel U.S. sales today.

Pork product and by-product export sales now represent about $25 of the value of a U.S. market hog, explains Grimes. Granted, other segments of the industry receive part of that benefit.

“But certainly it is an important part of the U.S. hog industry, and without it we would probably have 15% lower hog prices through the first five months of this year,” he estimates.

Live hog prices for April and May averaged $45/cwt. for southern Minnesota/northern Iowa markets, says Grimes. He predicts second quarter prices will average $46-47; third quarter, $42-45; and fourth quarter, $37-40.

Red ink will dominate hog prices in 2007, but there will be profitable periods as well, he says.

Meyers notes recent rallies in fall Chicago Mercantile Exchange Lean Hogs Futures prices offer some nice pricing opportunities that producers should seriously consider.

Grimes predicts that growing production losses in the United States, due to PCVAD, will mitigate some red ink for producers later this year. Several parts of the country are reporting performance and production losses, with death losses of up to 50% being reported in some North Carolina herds.

Corn Price Concerns Are Growing

In the next two years, the biggest variable for cost of production will be the price of corn, relates Meyer. The day of cheap corn may be over (Figure 2).

“We are heading pell-mell toward an ethanol world. It seems like every week there is an announcement of a 100-million-gallon plant being built somewhere. It's going to put a lot of pressure on our corn supplies.”

The result of the explosion in the ethanol industry is that the United States is building a usage base of 11-plus-billion bushels of corn/year — something corn growers have only achieved twice in history, he points out.

Should a drought occur — and there has not been a serious, widespread dry spell in this country since 1988 — Meyer is very concerned about the impact on livestock feeders, since mandated renewable fuel usage will force feeders and exporters to do all of the rationing of a short corn supply.

Nothing could take the fun out of raising $30 hogs faster than feeding them $6 corn, Meyer asserts.

Consumer Survey an Eye-Opener

A 2005 U.S. Department of Agriculture report of the meat-eating habits of some 20,000 American consumers surveyed during 1994-1998 provides some eye-opening findings.

The results were reported at the Pork Academy, preceding World Pork Expo in Des Moines, IA, by Ron Plain, University of Missouri Extension agricultural economist.

  • About 62% of the pork consumed is processed; ham is the leading type consumed.

  • Men consume much more pork per year than women, 65 lb. vs. 37 lb.

  • Americans eat more beef than pork, especially during ages 20-40; but past age 60, men eat more pork than beef.

  • Low-income Americans eat more pork/person than wealthy Americans, says Plain. Wealth brings a reduction in consumption of both pork and beef and a rise in consumption of seafood.

  • More pork is eaten at home, about 40 lb./year vs. about 8-9 lb./year consumed at restaurants.

  • As incomes rise, less pork is eaten at home and more pork is consumed in restaurants.

  • Black Americans eat significantly more pork than white Americans, 63 lb. vs. about 49 lb. on average.

  • Midwesterners eat the most pork of any region in the United States, at 58 lb., followed by southerners at 52 lb.

  • Americans are eating fewer meals in restaurants, opting for take-out or delivery services to save time.

  • Americans are eating more meat overall, estimated at 240 lb. in 2006. That is an increase of 64 lb./person compared to about 50 years ago. Per capita consumption of meat is rising a little more than a pound a year.

  • Pork consumption has stayed relatively flat at about 50 lb./person, whereas, chicken consumption has skyrocketed from about 18 lb. five decades ago to 88 lb./person today.

TAGS: Marketing