The next 60 days will be pivotal for the direction of the U.S. pork industry, says Purdue University agricultural economist Chris Hurt.

Come the end of July, corn pollination will be finished, and crop farmers will know the fate of the corn crop, and with it the chances for the industry to move forward profitably.

Bad Breaks

Pork producers started off the first quarter of 2013 anticipating a strong rally that would lift live hog prices back to $70/cwt. Trouble was $7.50-$8.00 corn lifted the cost of production near $70, but hog prices fell short of that mark, Hurt recalls, keeping prices in the red.

Then to add on more woes, pork export discouragement came in February, when Russia placed a ban on purchases of U.S. pork due to concerns about ractopamine residues. China also began to examine the issue more closely.

Japan, one of the biggest buyers of U.S. pork, devalued the yen, making U.S. pork more expensive. Japan’s  launch of a major monetary stimulus program by printing more money has also served to depress their currency and impose an even bigger negative for pork exports to that country, Hurt points out.

For the first quarter, hog prices struggled to reach $60, with losses of near $10/cwt. Then the March Grain Stocks report dropped corn and bean futures and cost of production to the mid-$60s; those costs are expected to dip to the lower $60s by late summer if a normal crop is developing.

“Hog prices returned to breakeven levels this spring, but in a different way than we anticipated with a lower cost of production,” he says. The current outlook is for producers to cover all costs this spring and summer and then get back to profitability this fall.

Feed Price Uncertainty

The kicker is the fate of the 2013 corn crop. “There is a lot of uncertainty on the feed cost side. If we could get back to normal or have an above normal crop, there will be a substantial reduction in feed costs, setting up a very profitable period for hog production and other animal industries,” Hurt projects.

 “If we can return this summer to more normal yields, then you really get surprisingly large reductions in prices of both corn and soybean meal.”

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For their part, farmers have done all they could to help increase grain inventories – pulling pasture land, bulldozing old barns and taking land out of the Conservation Reserve Program to plow back into crop production, Hurt says.

If the weather cooperates and an average corn crop is produced, the U.S. Department of Agriculture estimates corn prices will moderate to $4.30-$5.10; the University of Missouri and the University of Illinois are projecting about $4.75. Hurt hedges his prediction at a range of $4.50 to $5.50 per bushel.

In the longer run, corn use for ethanol has leveled off and the rate of increase in soybean exports to China is also expected to slow as China’s economic growth slows and competitive soybean supplies from South America grow.

This paradigm shift should carry over into the next 3-5 years, ushering in a period of lower feed costs and returns in the black for the animal agriculture industries, he observes.

There is a narrow window of $5-6 per bushel corn that Hurt likens to the “sweet spot” for American agriculture. It’s a place where the livestock industries can at least get back to covering production costs and grain producers can also cover costs. If corn goes lower than $5, there will be more livestock expansion due to growing margins, but crop producers will begin to feel the margin squeeze.

A normal crop will create grain reserves that build inventory and help producers forget “one of the toughest periods of tremendous economic shock for the whole animal sector and hog production in particular,” he proclaims.

The biggest driving force for animal production the last five years was feed prices. But that will shrink in importance if the 2013 corn and soybean harvests produce normal crops.   

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