January 10, 2007

 

Increased feed costs likely to affect US hog profits

 

 

Much higher feed costs are likely to eliminate the profit potential for US pork producers in 2007, and while 2007 may be close to break-even overall, there are concerns that even higher feed prices could drive the industry into losses, said Chris Hurt, agricultural economist at Purdue University.

 

In his latest market outlook report issued Monday (Jan 8), Hurt said that after three years of favourable returns, hog producer costs in 2007 are expected to be up about 18 percent from the two previous years. This will be driven by higher corn prices, which are projected to be up 63 percent while soymeal prices are expected to be up a much more modest 4 percent.

 

In addition, there is considerable uncertainty surrounding feed costs in 2007 as the corn and soybean sectors adjust to the rapid explosion in corn demand for fuel ethanol, he said.

 

"The pork industry has not adjusted much yet to the new realities of corn and soymeal prices," Hurt said. "The breeding herd remains in a slow expansion and is about 1 percent larger than the herd of a year ago."

 

Over the past two years, the breeding herd has risen by a modest 2 percent representing 120,000 more animals, Hurt said. The expansion has come mainly in two regions. The first is in the eastern corn belt (Indiana, Illinois, Ohio, and Wisconsin) where breeding herd numbers have been up 80,000 head. The second is the central Plains (Colorado, Kansas, and Nebraska) where numbers were up 40,000 head. Most other areas have seen only slight changes.

 

Hurt predicts 2007 pork production at 21.4 billion pounds, which would be the sixth consecutive year of record pork output. He expects the year's hog slaughter to reach 107.3 million head.

 

"The growth of pork exports is the reason for this continued US industry growth," Hurt said. "Exports rose by 1.4 billion pounds from 2002 to 2006, while domestic consumption was about unchanged. A critical question for the future of the US pork industry is how will the diversion of so much corn to fuel impact the US industry's ability to grow the export market in coming years?"

 

Hurt expects hog prices to remain relatively strong in 2007 given record high production, with live prices to average about US$48 per live hundredweight, or US$64.50 on a carcass basis. Live prices averaged US$47.34 in 2006 and US$50.10 in 2005. He expects first-quarter prices to average in the mid-US$40s then move up to average near US$50 for the second and third quarters before falling back to the mid-US$40 in the final quarter.

 

The cost of production, based on closing prices for corn and soymeal futures on Jan 5, are expected to average near US$47 on a live basis in 2007, Hurt said. This compares with a US$40 average for the last two years.

 

Volatility in corn and soymeal is likely to remain high, and this may mean opportunities to buy the inputs on market dips, he said.