November 21, 2011

6 Min Read
2012 Projected the Best Year For Hogs in High-Priced Feed Era


The pork  industry is expected to have a profitable year in 2012. In fact, the level of  profitability could be the most favorable during the high-priced feed era, says  Chris Hurt, a Purdue University agricultural economist.

“Profits  in 2012 are currently forecast to be near $17 per head, which would be the  highest since 2006. That was the last year of the low feed-price era when  corn prices received by farmers averaged about $2.30 per bu. for the calendar  year and estimated hog profits were $27 per head,” he says.

Although a  return to profitability is welcome news, there are deeper and more important  implications, he says.

“The first  is that the pork industry, like most other animal industries, has made the  adjustments necessary to live in a world of high-priced feed. The second is  that the pork industry probably has turned the corner on high feed prices as we  look to 2012 with abundant and cheap feed wheat, prospects for moderation in  the rate of growth in corn use for ethanol, the potential for a larger South  American soybean crop, and hope for a return to higher U.S. corn and soybean  yields,” he says.

The pork  industry had a difficult road making the transition to the high feed-price era,  as did all animal industries. High feed prices and recession in 2008 and 2009  and H1N1, unfortunately termed swine flu, led to large losses in 2008 and 2009,  estimated at $17 and $24 per head, respectively, he says.

“These  large financial losses resulted in some downsizing of the industry through  discouragement and bankruptcy. As a result of downsizing and robust pork buying  from foreign countries, the amount of pork available to U.S. consumers will  drop from about 51 lb. per capita in 2007 to around 46 lb. in 2012. This 9%  reduction of per capita supply has enabled retail pork prices to rise from  $2.87 a lb. in 2007 to $3.43 a lb. in 2011, a 20% increase,” he notes.

The large  loss years of 2008 and 2009 ($17 and $24 per head) will finally be offset by  the profitable years of 2010, 2011 and 2012 ($14, $10 and $17 per head). Hog  producers would say this in a different way: It has taken three years just to  get back the money lost in the two bad years when feed prices surged, he says.

“Another  way to look at this is to say that the pork industry has adjusted to $7-a-bu.  corn such that they can break even if cash corn prices stay at that level and  make money if prices are below $7. The current prospect for cash corn prices to  be in the lower $6.00 area is a primary reason for the profit opportunity in  2012,” he says.

Are feed  prices now moving into their post-peak period? No one can know the answer  with much confidence, but the declining prices of corn and soybean meal since  August will have many debating that issue. There clearly are fundamental  reasons to believe that could be the case, as we have just itemized, he says. 

The  post-peak price feed period would be expected to be one of both lower feed  prices and less volatile prices. These are conditions that would favor  expansion of animal production, including the pork industry, he notes.

“Of  course, pork producers do not quickly forget $7 and $8 corn prices and  should be cautious in quickly expanding herds. Perhaps the best and most  logical advice is for them to use the expected profitability in coming months  to enhance their financial positions and to wait and see how the 2012 U.S.  crops evolve before moving toward expansion in late 2012,” Hurt says.

An ominous  threat remains: the Southern Plains drought that has recently crept into the  western Corn Belt, although NOAA sees improving moisture conditions for the western  Corn Belt this winter, he says.

“Hog  prices are expected to trade in the mid-$60s this winter and improve to the  very low $70s in the second quarter on a live weight basis. Prices are expected  to moderate a few dollars in the third quarter and then fall to the mid- to  higher $50s for the final quarter of 2012. By the end of 2012, signs of pork  expansion may begin to lower prices, and those lower prices would be expected  to extend into 2013,” he notes.

Although  the financial outlook for pork producers has continued to improve this fall,  the general economy remains a “shadow of doubt” for the pork market that cannot  be overlooked, Hurt says.

The  European debt issues have been delayed but not yet dealt with. Much like  Europe, the U.S. government seems unable to agree on a plan for dealing with  the current unemployment problem and long-term debt concerns, he says.

“If these  worries should lead to slower, or negative, economic growth rates, weak  consumer incomes could lead to lower pork prices and a less favorable pork  outlook. Clearly, this is another reason for pork producers to be hesitant in  expanding production at this time,” he says.

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