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Producers Reluctant to Expand

Despite more than a year of profitability, U.S. pork producers are holding off on expansion, says Purdue University agricultural economist Chris Hurt.

The June 1 Hogs and Pigs Report showed expansion of less than 1% in the U.S. breeding herd, and summer and fall farrowings will be unchanged from last year’s level.

“Pork supplies will, however, be larger in the next 12 months as a result of a higher weaning rate and a modest increase in weights,” states Hurt.

Pork supplies will climb about 1%, so the supply of pork per person will be nearly identical, he notes.

“Demand will be more important to prices than supply in the coming year,” he says. “Demand will be led by exports, which are expected to remain strong. U.S. consumer demand may not be as strong as in the past year.”

USDA forecasts are for pork exports to increase by 17% in 2005, says Hurt. The June 24 announcement of the discovery of a second case of bovine spongiform encephalopathy (BSE) in the United States will extend delays in opening U.S. beef export markets and support continued strong pork exports.

“On the domestic front, pork demand is not expected to be as robust in the coming 12 months, and is the primary reason for lower hog price forecasts,” says Hurt. “Pork and other meats rode the crest of a high-protein diet wave in 2004. While those diets are still popular, there is not as much media attention as in 2004.

“More importantly, packer and retail margins were narrow in 2004, resulting in higher producer hog prices. This year, marketing margins are likely to increase to more normal levels, which will have a negative impact on prices received by producers,” he says.

The Purdue economist expects live hog prices to erode into the low $40s by fall, climb to $44-48 in the first quarter of 2006 and rebound to near $50 for the second quarter of next year.

Hurt expects producers will be able to cover their costs over the next 12 months.

“Hog prices are expected to average around $47 over this time period,” he explains. “Current dry conditions, especially in the eastern Corn Belt, have added anxiety to the feed cost outlook. Using futures prices for corn and soybean meal on June 27 – $2.40/bu. for December corn futures and $220/ton soybean meal futures – estimated costs of production for the coming 12-month period would be around $42.50/cwt.”

Returns over the last 12 months have helped operations to stabilize financially, says Hurt. Estimated profits have been $13.50/cwt. or about $36/head.