January 30, 2009

 

US hog producers may be taking some comfort in more stable production costs, but recent declines in lean hog futures have narrowed the profit outlook for this spring and summer.

 

While corn futures prices near US$4 a bushel are high on a historical basis, the current levels are about half of where the record highs were set last summer. The problem for many hog producers and other livestock and poultry feeders is that they have lost money during much of the past year and have less equity.

 

For hog operations, the prospects of making some of the losses back in 2009 are not as bright since the summer futures contracts have declined about 8 cents a pound from the early January highs. Most contracts, including nearby February and most-active April, hit new lows earlier this week.

 

Chicago Board of Trade corn prices range from around US$3.80 in the March contract to US$4.25 in December. Using an average price of US$4 for corn and US$300 per short tonne for soymeal, the breakeven cost for hogs would be about US$70.25 per hundredweight on a dressed basis, or around US$52.75 live weight. The breakeven calculations are made based on a grid provided by John Lawrence, agricultural economist at Iowa State University.

 

Swine producers who locked in their hog prices for this spring and summer - using futures contracts or options when the board was considerably higher - are looking at a nice profit, said a veteran livestock market manager in the western corn belt. The manager, who requested anonymity, said he and others in the firm had encouraged producers last summer and fall to hedge at least a portion of their hogs for 2009.

 

Bob Brown, a private analyst in Edmond, Oklahoma, said producers had the opportunity last summer to sell futures from 90 cents a pound in the spring contracts to up to US$1 a pound for the summer months. Even in early January, April futures could be sold at 71 cents and June hogs at more than 82 cents for a brief period before prices began a three-week slide.

 

With only a narrow spread remaining between lean hog futures and projected breakeven prices, some producers may consider further liquidation, or selling off part of their sows. There have been anecdotal reports that some producers, mainly with smaller operations, were considering selling all of their breeding animals and getting out of the hog business altogether.

 

Brown predicts that some liquidation will continue, mainly among the smaller producers. The reduction that could occur in this sector, however, may be mitigated by possible mild expansion among the larger production units and by increased productivity in the other operations.

 

Canada's hog herd is also constricting, so that may mean even fewer hogs to be imported from there for feeding and slaughter in the US Tighter supplies could be seen by this spring and may continue to be lighter into 2010, Brown said.

 

The US Department of Agriculture, in its latest monthly supply-and-demand report released Jan. 12, projected 2009 US pork production at 23.054 billion pounds. That's down 90 million pounds from the projection made the previous month. The average annual price estimate in the January report for slaughter hogs was $47 to US$51 per hundredweight on a live basis, down US$1 from the previous month.

 

USDA's World Agricultural Outlook Board, which prepares the monthly supply/demand reports, said the projected pork production figure for 2009 was lowered from the previous month due to expected reduced farrowings and lighter carcass weights. The USDA said this occurred "as producers adjust to earlier poor returns." The price forecast was lowered slightly due to weak demand that is expected to offset smaller red-meat supplies.