Hog expansion was set to begin this fall – before corn futures hit $5. Those plans may have been appropriate when corn was priced at $3.50 in early July – but not now when prices are considerably higher, says Purdue University Extension economist Chris Hurt.
“Higher corn prices will cut margins over the coming 12 months, but hog producers can now avoid an expansion that would plunge margins deep into the red in late 2011 and 2012,” he notes.
The clear message to hog producers is: Don’t expand and margins will be okay. The other important message is: The next two years won’t be a repeat of the large losses seen in 2008 and 2009, Hurt explains.
So far expansion has not occurred based on the September USDA Hogs and Pigs report. Producers report 2% fewer animals in the breeding herd than a year ago, he says.
The key state in the report is North Carolina, where breeding herd numbers fell 110,000 over the past year. Without North Carolina, the net effect of all other states was close to unchanged, he reports.
One key to expansion is to watch large corporate North Carolina producers. “There is likely little appetite for expansion over the next 12 months that would throw the industry back into losses,” Hurt says.
The number of market animals was down 3% on Sept. 1, which will lead to a reduction in slaughter numbers of 3% in the last quarter this year and down 1% in the first quarter of next year. Fall farrowing intentions were down 1% and will result in unchanged to 1% higher slaughter numbers in the second quarter of 2011.
A modest rise in winter farrowing intentions will produce 1-2% more slaughter numbers next summer; the final quarter of 2011 might see slaughter numbers rise 2-4%, he says.
“Marketing weights dropped below year-ago levels in late August as higher corn prices began to have an impact. Given the expectation for corn prices to remain high for the 2010 crop, it is likely that weights will continue to be down one-half to 1% through next summer,” Hurt predicts.
“This means pork supplies will be down 3% in the fourth quarter this year, down 2% in the first quarter of 2011, unchanged in the second quarter, up 2% in the third quarter and up 3-4% in the final quarter of 2011,” he says.
There are three critical reasons why pork producers won’t repeat the losses of 2008 and 2009 even with corn prices at $5/bu.:
- Pork producers have adjusted their herds lower such that they can pay $5/bu. for corn and still maintain positive margins;
- The United States and world economy will continue to recover; and
- H1N1 won’t deflate hog prices.
The high cost of pork production resulting from high-priced corn has been passed to consumers who are now paying record-high prices for pork. Retail pork prices averaged $3.23/lb. for August, compared with $2.93 in 2008 and 2009, Hurt explains.
“It was a long and difficult adjustment for the industry to reduce production over the past three years, but that is behind us. Now national average hog prices will be high enough over the next 12 months to pay up to $5.50/bu. for corn and still cover all costs. This is a much different situation than in 2008 and 2009 when the breakeven corn price for hog producers was only $2.70/bu.,” he notes.
Hog prices are expected to average about $55/cwt. live weight basis for the final quarter of 2010 with a breakeven corn price of $5.15. A $56 average price is projected for the first quarter of 2011 based on a breakeven corn price of $5.30.
Prices improve to $60 and $57 in the second and third quarters of 2011, respectively, with corn breakeven prices of $6.10 and $5.50/bu. Just a 4% increase in production drops hog prices back near $50 and corn breakeven prices to $4.10, demonstrating how even modest expansion can put profit margins at risk.
“Plans for expansion need to be put on hold for another year until the size of the 2011 corn and soybean crops are reasonably known. World corn inventories cannot be rebuilt on southern hemisphere production this winter. A large crop in the United States and northern hemisphere in 2011 will be required to begin to restore inventories,” he says.
In the next 12 months, producers should avoid expansion, increase feed efficiency and reduce market weights, and margins should remain positive.
Don’t worry about the size of the 2011 crops. “For now, don’t expand, do what you can and leave adjustments to 2011,” he says.