Pork industry favored by strong demand

Feed costs will be the lowest in a decade and total production costs are expected to be at decade lows.

April 12, 2017

4 Min Read
Pork industry favored by strong demand
National Pork Board

Source: University of Illinois
Hog prices are expected to increase in 2017 even with 3% more pork production. Prices will be supported by stronger demand because of a growing U.S. economy and by a robust 8% growth in exports as projected by the USDA.

According to Purdue University Extension economist Chris Hurt, new packer capacity is also expected to contribute to stronger bids for hogs. Feed costs will be the lowest in a decade and total production costs are expected to be at decade lows.

“The recently updated USDA inventory report found the nation’s breeding herd was 1% larger than the herd of a year ago,” Hurt says. “This continues a rebuilding of the herd that began in 2014 as feed prices began to move sharply lower and the industry began to recover from pig losses due to PED (porcine epidemic diarrhea. The national breeding herd has increased by 4% since 2014.”

Notable expansions of the breeding herd in the past three years have occurred in Missouri (25%); Ohio (9%); Illinois (8%); and Indiana, Nebraska and Oklahoma (each up 4%). Farrowing intentions are up 1% for this spring and slightly below year-previous levels for this coming summer.

Producers indicate to the USDA that they had 4% more animals in the market herd, reflecting 4% higher farrowings last fall, a 3% increase in winter farrowings and a 1% increase in the number of pigs per litter.

“Given these numbers, pork supplies are expected to rise by 5% in April and May and then drop to a 4% increase for June through August,” Hurt says. “Three percent more pork can be expected for September through November of 2017 with supplies up 1% this coming winter compared to year-previous levels.”

Live hog prices averaged about $46 last year with losses estimated at $11 per head. Hurt says prices are expected to be $3 to $4 higher this year. Live hog prices averaged about $50 per hundredweight in the first quarter of 2017. Prices for the second and third quarters are expected to average in the very low $50s. Prices will likely be seasonally lower in the fourth quarter and average in the mid-$40s. If so, prices would average near $49 for the year and be slightly under projected total costs of production with $1 of loss per head. This is basically a forecast for a breakeven year with all costs being covered, including labor costs and equity investors receiving a normal rate of return.

According to Hurt, current expectations are for feed prices to remain low in 2017, but with corn prices increasing into 2018. On a calendar-year basis, U.S. corn prices received by farmers averaged $6.67 per bushel in 2012 (unweighted by marketings). Those prices fell to $3.48 per bushel in the 2016 calendar year and are expected to be only a few cents higher in 2017. Current prospects are for corn to be 20 cents to 30 cents per bushel higher in calendar year 2018 due to sharp reductions in 2017 U.S. acreage.

Soybean meal averaged $478 per ton in 2014 (high protein, Decatur, Ill.), but is expected to average only $315 per ton in 2017, the lowest calendar-year price since 2010. Total feed costs per hundredweight are expected to be the lowest in a decade dating back to 2007. Total costs of production may reach 10-year lows. Hurt says the estimated total costs of production reached $67 per live hundredweight in 2012 driven by high feed prices. For calendar year 2017 that may drop to $49.50, which is the lowest estimated total costs of production since 2007 and would represent 10-year lows.

What are the potential shadows for the industry this year?

“The first is that meat and poultry competition will be high,” Hurts says. “In addition to 3% more pork, beef production is expected to be up 4% and poultry production up 2%. There is simply a lot of competition for the consumers’ food dollars.

“Second, the optimism for the U.S. economy that has been present in early 2017 could falter,” Hurt continues. “This optimism is related to a stronger job market, low unemployment and record-seeking stock market indexes. The anticipated stimulus package of the new administration has likely been a contributor. Time will tell if Congress can agree on this legislation and move it from anticipation to reality. In addition, the Fed is likely to continue a series of interest rate increases to slow growing inflation pressures.”

Decade-low feed cost is an important reason pork producers are expected to almost cover all of their costs this year, Hurt says. Weather in the United States and in the Northern Hemisphere will be important in the final determination of yields and feed prices.

“The industry needs to keep expansion of the breeding herd to near 1% each year,” Hurt says. “This 1% increase along with about 1% higher weaning rates means the industry can increase pork production about 2% a year. That is sufficient to cover a 1% growth in domestic population and about 1% annual growth needed to expand exports. Growth of the breeding herd at more than 1% could shift the industry back into losses.”

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