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Producers Face Some Tough Losses Before Profits Return

Extraordinary losses for pork producers in 2008 may be offset by extraordinary profits in the last half of 2009 and 2010

Extraordinary losses for pork producers in 2008 may be offset by extraordinary profits in the last half of 2009 and 2010, says Purdue University Extension Marketing Specialist Chris Hurt.

“This will be especially true if Conservation Reserve Program (CRP) land is relapsed in 2009, if ethanol receives less support, if 2009 weather is favorable, and if crude oil prices don’t keep moving higher,” he suggests. “There are still plenty of uncertainties, and most won’t feel relieved about ‘better times’ until they arrive.”

In reviewing the pork market, Hurt says he believes the product is dramatically undervalued.

“Pork is cheap in the United States, but it is ‘dirt cheap’ for many of our foreign buyers since the strength of their currencies effectively lowers the price even more,” he says. “Pork is at bargain basement prices when you realize that U.S. producers are producing and selling hogs at huge losses.

“In essence, U.S. producers are providing huge subsidies to U.S. and foreign consumers. Why wouldn’t the world’s pork buyers be banging at our door for these bargains? Why would foreign pork producers want to try to compete with U.S. producers?”

Hurt believes all indications point to U.S. pork prices exploding to the upside similar to what other commodities have done. The question is, when will that happen?

To understand the situation, look at cheap domestic pork. Retail pork prices in 2008 have averaged $2.85/lb., compared with $2.87 for 2007. Hurt says pork producers have contributed to the lower pork prices with about $1.4 billion in losses in the first half of 2008 alone.

“The cheap U.S. dollar relative to currencies of other countries with which we trade pork should stimulate exports and reduce pork imports and that is exactly what is happening,” he reports. “For the first four months of 2008, pork exports have expanded by 52% and imports have dropped by 12%.”

Trade accounts for a large portion of the record pork production in the United States, Hurt adds.

For the first four months of 2008, commercial production was up 11%, yet when trade was considered, the amount of pork available to U.S. consumers was only up 6%.

“That is to say that additional trade has accounted for about 5% of all the added pork production in early 2008,” Hurt says. “More importantly, the export parade is just getting rolling as pork exports reached a record 22% of U.S. production in April. This was up from a mere 14% for all of last year.”

Many countries are now upping their purchases of U.S. pork products.

“U.S. pork is going almost everywhere as the world has discovered one of the last food bargains on the globe,” Hurt points out. “About one-half of the higher exports this year compared to the same period last year are headed to China and Hong Kong.

“Exports to most other major buyers are up as well, with Japan up 14%, Russia up 58% and Canada up 27%. It is becoming clear that the world will continue to buy up the huge U.S. production until pork prices move sharply higher. Maybe U.S. consumers can’t eat all of the U.S.-produced pork at profitable prices to producers, but the world can,” Hurt says.

The flooding that has contributed to corn prices moving up to $7/bu. and the bleakness of the latest hog outlook report have convinced more producers to slaughter sows. The USDA Hogs and Pigs Report showed the breeding herd down about 1% with farrowing intentions to drop by 2% this summer and decline by 4% this fall.

“Both of those declines will likely be larger since the USDA survey was taken before the June flooding,” he says. “Another 2% drop would put the summer farrowings down 4% and fall down 6% – some serious declines.

“Slaughter supplies will be up by about 10% in July, and then the percentages will begin to drop, with 6% higher supplies in August and 4% more in the fall. Winter slaughter supplies could finally be down by 3%, and spring 2009 supplies could be down as much as 5%,” Hurt projects.

Given U.S. slaughter projections, he expects prices will improve very late this fall and winter and become much higher by next spring and summer.

“Trade will likely continue to accelerate, and this will encourage even stronger prices than the supply reductions expected for late this year and 2009,” Hurt comments.

Cattle prices have started to make gains, up nearly $10/cwt in the last three weeks, and he expects hog prices should soon follow.

“If U.S. consumers don’t want to buy up the last of the cheap pork, the world is anxious for the opportunity,” he says.

“The issue for individual pork producers is whether they can hang on long enough for hog prices to catch up with costs. Expectations now are for live hog prices to trade in the lower-to-mid-$50s for this summer and fall, then to move into the low $60s by winter and on to the higher $60s and mid-$70s by next spring and summer. Given prices of corn and soybean meal on July 7, costs of production for farrow-to-finish producers are estimated to be in the low $60s.”