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Pork industry still reeling from economic hurricane

By MEGGIE I. FOSTER
Assistant Editor

INDIANAPOLIS, Ind. — While it would’ve been uplifting to hear a bit of good news for once, hog producers were doused again with more of the same ol’ sad economic story from economist Ron Plain during the Midwest Pork Conference last week.

Plain, a professor at the University of Missouri and also a contributor to the Hog Outlook column published each week in Farm World, said prices will remain low through the end of ’08 and into ’09, cost of production may continue to increase and demand for pork will remain static.

“Times have certainly gotten tough again in the hog business,” Plain said. “Pork producers are going broke, some fast, some slow – but they’re going broke. For the last 21 of 23 months, producers have been losing money consistently. It’s not as bad as ’98, but we’re headed there.”

On average, Plain said producers could lose an estimated $18-$19 per animal, while on the spot market it could be more like a loss of $21-$22 (per animal). Plain reported that the current price per cwt. for live hogs is $47 (as of Sept. 16) and the cost of production is $13.85 above the 13-year average.

“Yes, prices really are that bad,” Plain joked. “And corn is the big culprit in this game.”

While the corn market doesn’t seem very predictable these days, Plain said to predict corn prices, one must predict fuel prices.
“They track up and down together,” he added. “Volatility in oil prices translates to the same in the corn market and feed costs.”

According to Plain, from 1998-2006, corn averaged $2.11. Since 2006, corn averaged over $4. “That’s a 90 percent increase in breakeven price for livestock and poultry production,” he said.
In light of the corn market’s effect on pork production, Plain said that more corn than ever before will be used to produce ethanol beginning in 2015 under the Renewable Fuels Standard (RFS) to produce 15 billion gallons.

“If there is any corn left, the price will be outstanding for livestock producers,” Plain indicated, hinting at a hopeful push by producers to make a change in the RFS before it takes effect in 2015.

To simply summarize why pork producers are losing money, Plain pointed to three key reasons: the cost of production, too much pork on the market and a weak demand for pork products.
Speaking to the fact there may be too much pork weighing down the market, Plain said that in 2008, U.S. pork production was 8.2 percent above the annual trend.

“For 78 years, producers have been 1.5 percent above the production level of the previous year and I don’t see any reason why we shouldn’t continue that trend,” he said.

While the export market has traditionally been a bright light in the pork industry, last year was no different with a 49 percent improvement from the previous year.

“And so far this is the second-best year ever,” Plain added. “Pork imports, however is a different story with a 14 percent loss. So exports plus imports is –1.3 percent. Foreigners took it all. We export four times more than we import.”

Then the non-swine flu came along and changed things even more, said Plain.
“Prices were supposed to rebound in July, expected to, then H1N1 hit the market and changed everything,” he lamented, adding that analysts estimate a $15 billion loss to the hog industry.
Unfortunately, Plain doesn’t anticipate a turnaround this fall or even next spring.

“We’ve been reducing the breeding herd at a steady rate, but not fast enough,” he said. “In the last 45 years, this has been the worst July in history with producers losing $24.58 per animal.”
On top of that, Plain reported that this summer has brought on heavier pigs, on average weighing 10 pounds more, and a 6-7 pounds heavier carcass.

“That’s 3 percent more pork on the market,” said Plain, adding that pigs love to eat when the weather is cool.
According to Plain, for the market to rebound by July 2010, with $3.60 per bushel of corn, “we’re going to need every bit of $50 per cwt./live for hogs. What’s the chances the futures market offering $54 per cwt.?”

Plain expects that the rate of slaughter will increase so that the price for hogs will move closer to the lower 60s by next summer.
As a bit of advice, Plain suggests forward pricing when possible.

9/23/2009