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Recession May Help Pork Producers Survive

The recession may actually help pork producers because of feed costs are ratcheting down, says Purdue University Extension Marketing Specialist Chris Hurt.

The recession may actually help pork producers because of feed costs are ratcheting down, says Purdue University Extension Marketing Specialist Chris Hurt.

“Lower costs in combination with smaller pork supplies in 2009 could be the combination that puts the industry back into profitability,” he says. “Hog prices may actually increase a few dollars in 2009, as the pork industry in both the United States and Canada reduces breeding herds due to this year’s losses. However, many uncertainties continue for the pork industry.”

Notably, hog prices collapsed, along with all other farm commodities. From a high of $52.56/cwt. average in August, live hog prices plummeted to about $39/cwt. for November. The last time prices dropped this much from their summer highs was in 1998, when live prices dropped by more than $25/cwt.

“Surprisingly, most of the decline is attributable to demand factors,” Hurt says. “Pork exports were flying high this past spring and summer as a result of a weak U.S. dollar and aggressive buying by China prior to hosting the August Olympics.

“In the period from April through July, exports represented 24% of U.S. production, compared to 13% for the same period in 2007,” he says.

But since mid-summer, several factors led to reduced pork trade.

China greatly reduced U.S. pork purchases after the Olympics. “In the first half of 2008, China accounted for 50% of the growth in U.S. pork exports. Their peak activity came in the second quarter when Chinese purchases reached about 7% of all U.S. production. Chinese purchases then collapsed in the third quarter, dropping by more than 60% to about 2.5% of U.S. production,” says Hurt.

A second factor has been the exchange rate of the U.S. dollar, which has increased in value about 20% since July lows, making pork more expensive for foreign buyers. As a result, USDA has lowered export projections by 7% for 2008 and by 12% for 2009.

“The financial crisis has had severe impacts on hog prices as well,” he continues. “Since Sept.26, when the crisis began to unfold, December lean hog futures have fallen by about $9/cwt., carcass, or about 14%. The impact on meat consumption is related to concerns about the depth of the recession.

“Generally, the negative impacts are greater for beef than for pork. Pork is generally a lower-cost retail product relative to beef, and is somewhat favored when consumers become more value conscious. Retail pork prices so far this year have averaged $2.92/lb., compared to $4.31 for retail beef.”

All of this may translate into higher prices and lower feed costs in 2009.

“Pork production is expected to drop by 2-3% in 2009,” says Hurt. “This may help hog prices average a few dollars per hundredweight higher than the $48 live price in 2008.”

Slightly higher hog prices will be good news to producers, but lower feed prices may be more welcome news.

For 2008, estimated cost of production was near $53, but recent lower futures prices suggest production costs could dip to $46-48 for 2009. Cash corn prices are projected to average $3.50/bu. in the coming year, vs. about $4.60/bu. in 2008. Soybean meal has declined to about $260/ton (at Decatur, IL, recently), compared to about $330/ton for this year.

“Farrow-to-finish pork producers operated under losses for much of 2008, losing about $14/hog,” Hurt says. “For 2009, the current price relationship could return the industry to about $5/cwt. of profits as prices move from the mid-to-upper $40s in the first quarter to the lower-to-mid $50s in the second and third quarters and finish the year in the very high $40s.”

But many uncertainties lie ahead, including the extent of the recession’s impact on domestic consumption and trade.

“In addition, feed prices, while more moderate now, will remain a key to a profitable 2009,” Hurt says. “Opportunities to both hedge lower feed prices and profitable lean hog futures prices for 2009 are now available.

“All producers will welcome these improved prospects, and high-risk producers will especially want to consider taking some of these positive margins,” he suggests.