March 30, 2011

 

US hog prices to peak soon

 

 

The highest US hog prices on record, which may be the highest hog prices for the next several years as well, will soon be arriving.

 

This will be further triggered if corn and soy shortages can be reduced somewhat this summer with favourable growing conditions.

 

On the other hand, if 2011 turns out to be a short crop production year, then the previous statement will be invalid as surging feed prices will force added liquidation of the hog herd this fall. But, you already knew how much was riding on upcoming crops.

 

USDA's March Hogs and Pigs report implied that pork supplies will be somewhat higher this year. However, demand factors are more important to hog prices now than supply. Those demand factors include the continued strong growth in export demand, the continued economic recovery in the US, and inflation in commodities.

 

The report indicated the market herd was up nearly 1%, primarily as a result of a somewhat larger than expected winter pig crop. This means pork production will likely be up somewhat over 1% in 2011. 

 

The breeding herd was also up modestly compared to year ago numbers. This is the first time since March 2008 that the breeding herd increased. The herd has been in decline for the last three years as producers were adjusting the herd due to high feed prices and large financial losses.

 

Producers indicated intentions to reduce farrowings by 3% this spring and again this summer. If producers follow through with these intentions, the size of the fall and winter pig crops will be smaller once again. North Carolina has seen the largest reduction of the breeding herd over the past three years, accounting for about 40% of the national reduction.

 

Pork producers have been forced by poor economics to reduce the herd so they can pay higher prices for feed. In addition, demand has recovered from the recession in late 2008 and 2009. USDA now expects pork exports to rise by 11% for the year. Actual pork exports for the limited data available for 2011 have been up 17% so far.

 

Secondly, retail prices of both pork and beef may become the factor that limits the upside potential of futures as they may reach levels where consumers begin to reduce purchases. My current forecast is that retail beef prices may move to US$4.90 a pound this year, up from US$4.40 last year, an 11% surge.

 

Pork prices are expected to reach US$3.40 a pound this year compared to US$3.11 last year, a 9% increase. Retail prices will move up sharply this summer and that is when some consumer push-back may be noted. Lean hog futures have some historic tendency to peak in early May and so this spring is a time for pork producers to consider larger hedging positions in lean hog futures.

 

Hog prices are expected to be at record highs this year, averaging in the very high US$60 or very low US$70 in the second and third quarters on a liveweight basis. Prices in the low US$60 are expected for the fall and winter of 2012. Cost of production this spring will be record high as well, averaging nearly US$65 per live hundredweight in the first three quarters.