January 14, 2008

 

High corn may cause US hog herd sell-off but 08 supply mostly set
 

 

Sharply rising corn prices may force some US hog operations to cut back their breeding herds, but 2008 slaughter hog supplies are essentially set.

 

Market analysts and economists said it takes about 10 months from the time the sows are bred to the time the resulting pigs will be ready for slaughter. Therefore, even if producers immediately begin reducing their breeding herds, it would not be reflected in lower slaughter rates for barrows and gilts until at least December and more likely the first quarter of 2009.

 

Speculation of possible liquidation soon by some hog producers circulated in the cash markets Friday after corn futures locked up the daily limit of 20 cents per bushel following the USDA's annual crop production and supply-demand reports. The gains pushed March 2008 corn to US$4.95 and December to US$5.13 1/2.

 

Ron Plain, agricultural economist, said sows that were bred in December and early January will farrow, or give birth, in March and April. The pigs born then will reach slaughter weight in September and October.

 

A veteran livestock dealer in Iowa said many of the larger hog operations locked in prices for their grain and soymeal before the recent market rally, so they have lower costs than currently reflected by the corn and soymeal futures markets. Some also have their hog prices protected through the use of futures or marketing contracts.

 

The dealer also said several of the mid-sized and smaller hog producers elected to use price protection on their hogs this fall, so they may still be making a profit or losing considerably less than what is reflected by the spot market price quotes.

 

The latest break-even price for hog producers, calculated by John Lawrence, agricultural economist at Iowa State University, is about US$49.50 per hundredweight on a live basis. Current cash hog prices reflect a live market of about US$34.25, which results in a loss of about US$40 per head.

 

Because some producers have not yet suffered losses on their hog sales, liquidation of breeding animals may be slow to begin, analysts said.

 

The deferred lean hog contracts at the Chicago Mercantile Exchange are higher Friday, reflecting expectations for rising corn prices to eventually result in reduced hog supplies. As of 1:15 p.m. EST (1815 GMT), December hogs were up 100 points at 71.00 cents per pound, while the February 2009 contract was up 90 points at 74.70 cents.

 

Plain said lean hog futures prices across the board are "too high" relative to his expectations for cash prices. He does not expect a reduction in hog supplies to occur until early 2009.

 

Rich Nelson, director of research at Allendale Inc., said although October and December lean hog futures are above his target prices of around 62 to 64 cents, he does not recommend selling those contracts at this time and adds that prices for October and December will be even higher by this spring.