October 13, 2006

 

US hog industry's reaction questioned as corn breaches US$3 level 

 

 

With surging corn prices at the CBOT, analysts and those in the pork industry contemplate the reaction of hog producers to rising feed costs. 

 

Rising a whopping 18 ½ cents, Monday, December corn. closed at US$2.89 ½ but regressed back to US$2.75 ½ Tuesday, according to CBOT.

 

The contracts for 2007 closed above US$3 per bushel, Monday but most finished under the US$3 level the following day recording US$3.06 ½ as the highest close in the month.

 

This surge could be attributed to growing demand for corn from ethanol producers along with strong gains in wheat futures due to an expected reduction in Australian wheat.

 

As corn is the main ingredient for hog feed, producers have in the past reacted to sharply higher corn prices by marketing their hogs earlier, thus resulting in lighter carcass weights. When high prices persist, producers start to reduce the size of their breeding herds.

 

However, analysts do not expect such changes this time round as the pork industry now consists of mainly large operations with more immunity from high corn prices.

 

Also, since some producers have locked in prices through the futures markets or other methods, higher corn prices may not have such an immediate impact. 

 

Corn prices would have to stay at US$3 (per bushel) for an extended period before producers would market hogs of lighter weights or implement a cut in production, Don Roose, analyst with US Commodities in West Des Moines, Iowa, said.

 

Another analyst felt the duration of the high price levels would be important as farmers may switch to other feeds when corn prices go up, for the short term, at least.

 

In late 1995 and much of 1996, when corn in central Illinois averaged US$4.00 per bushel, hog producers reduced production. Slaughter in the first quarter of 1997 fell 5 percent from the previous year, but by the end of the year it had recovered and was 5 percent above the previous year's figures.

 

Even then, average dressed weights for hogs in 1996 remained the same as those from 1995, Brown said.

 

Since then, corn prices have not risen above US$3 in central Illinois since 1996 except for a bried period in 2004. Thus, it might take US$4 corn prices to see a change in producers' behavior, analysts said.

 

Most experts said producers have already seen the writing on the wall and have prepared for high corn prices and may have already made adjustments to their production plans.

 

Some producers have accelerated sales this year and with some having taken a huge investment in their hog farms, they would not be likely to cut back, especially the furrowing and grow-out operations.

 

Hog carcass weights have been growing at about 1.1 pounds a year since 1998. However, carcass weights typically drop by about 1.2 pounds per head for each 50-cent per-bushel hike in corn prices, an analyst said.