July 11, 2006

 

High corn prices dragging down pork profits in the US

 

 

Even as pig inventories remain stable, producers continue to avoid expansion in the face of strong profits over the past two years.

 

The industry is expected to continue to gain modest profits through the first-half of 2007. However, higher corn prices may wipe out the thin margins.

 

The breeding herd on June 1 was up 1 percent from the inventory of a year ago. Indiana led the increase with a 20,000 head increase and South Dakota producers added 15,000 head to the breeding herd.

 

Although the number of market hogs edged slightly higher, it is less than expected. The number of pigs coming to market in July and August were unchanged from last year and the fall supply should be about one percent higher than last year. 

 

Pork supplies are expected to be up only 1 percent this summer and 2 percent in the fall.

 

For the first-half of 2007, pork production is expected to be up 1 to 3 percent.

 

Hog prices for the first-half of 2006 have dropped 13 percent, averaging only US$45, compared to US$52 in the first-half of 2005.

 

The hog market experiences large changes in price with small supply changes.

 

Hog prices provided a surprising upward surge this spring as prices moved from the high US$30 in early-April to the higher US$50s by mid-June, as smaller than expected slaughter counts decreased supplies.

 

Third quarter prices are expected to average in the US$46 to US$48 range. A transition from high prices in the high US$50s in early-July to the mid-US$40s by the end of September is expected. For the fall and winter quarters, prices are expected to average about US$44. Some improvement is anticipated into the spring of 2007, perhaps pushing prices to an average near US$46.

 

Experts are now more optimistic about hog prices for the next 12 months but anticipated costs are moving up also.

 

Given current corn and meal prices, estimated costs will move from the high US$30 this past spring to about US$43 to US$44 by the spring of 2007 thanks to higher corn prices.

 

The industry is expected to experience profit margins of about US$7 per live hundredweight this summer, but only US$1 to US$3 per hundredweight from the fall through the spring of 2007.

 

The industry, profitable since the spring of 2004, would enjoy its tenth consecutive quarter of profits next quarter if profits remain stablem, forming the longest run of profits since the mid 1980's.

 

However, two threats loom ahead for the pork industry- rising corn prices and potential loss of pork exports with the reopening of the Asian beef market.

 

Corn price uncertainty appears to be a larger concern. Drought and warm temperatures this season has raised concerns about corn harvests. Rising corn utilisation for ethanol also meant a tightening in the supply of corn.