Herd Reductions Signal First Signs of Economic Recovery

Pork production losses are declining and herd reductions should result in a return to profits in the spring of 2010, according to Purdue University Extension Economist Chris Hurt

Pork production losses are declining and herd reductions should result in a return to profits in the spring of 2010, according to Purdue University Extension Economist Chris Hurt.

“On the supply side, the USDA’s Sept. 25 Hogs and Pigs report revealed slightly larger reductions in the herd than had been expected. The breeding herd was down 3.1% over the past year compared to an anticipated 2.5%. The number of pigs weighing less than 60 lb. was down 3.7% compared to an anticipated 2.5% reduction. The market herd was down 0.7% more than pre-report guesses,” he says.

The breeding herd declined only 5% in the past two years, and that drop has been partially overshadowed by higher weaning rates and heavier market weights. The result was just a 2% drop in production in 2009, with predictions of only a 1-2% drop in 2010.

But improving demand may have more of an impact on hog prices than reduced supply.

“Many economists believe the recession is over. It is widely anticipated that gross domestic product numbers for the third quarter of 2009 will be positive, signaling the end of this long and deep recession. The U.S. estimate will be released on Oct. 29. While the recovery in the U.S. economy will be slow with unemployment staying high, positive growth numbers will tend to help consumers ‘free up’ spending on meat,” Hurt says.

Lower pork prices will also be positive for pork consumption this fall.

“In the first half of 2009, U.S. pork prices averaged $2.95 per retail pound compared to $2.87 in the first half of 2008. It was very difficult to sell larger U.S. pork supplies at higher prices early this year,” he says.

However, a pattern of lower retail pork prices is anticipated through the fall and winter of 2009.

“Lower pork supplies with lower retail prices should strengthen hog prices and result in a higher portion of the retail pork expenditures flowing back to producers,” Hurt says.

Look for pork exports to gain strength as well.

“World economic recovery is expected to have more upside potential than the U.S. recovery. In addition, the value of the U.S. dollar is expected to remain weak and will be another reason that foreign pork purchases could increase,” Hurt says. Agriculture Department forecasts are for pork exports to increase 9% over the next nine months compared to the same period a year ago.

“Just as the world economic slowdown helped plunge the animal industries into recession more quickly than the crops sector, the world economic recovery may help lift the animal industries out of recession more quickly than the crops sector,” Hurt suggests.

Some reduction in domestic production and improved exports will drop per capita pork availability in the United States by 3-4% in the coming nine months. This trend, along with lower U.S. retail pork prices, better incomes and improving consumer attitudes will provide the basis for strengthening hog prices.

Hog prices are expected to average in the high $30s on a live-weight basis for the final quarter of 2009. Prices are expected to rise to the low $40s this winter and then move into the mid-$40s for second-quarter averages. Next summer’s prices are expected to rise into the high $40s for an average and the low $50s for weekly highs,” Hurt predicts.

Declining input costs for corn, soybean meal and energy will help reduce losses this fall and winter. Cost of production estimates are $44-46/cwt. for this time period and $45-47/cwt. for the spring and summer of 2010.

“Given these costs and the hog price outlook, farrow-to-finish producers are expected to lose about $15/head this fall and $7/head in the winter. Margins would turn to small profits of about $2/head in the spring and $12/head in the summer. For all of 2010, current forecasts are for about $3/head of profits vs. losses of $22/head in 2009 and $17/head in 2008,” Hurt says.

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