October 30, 2006

 

US hog producers' profitability at doorstep of new record

 

 

With October soon drawing to a close, US pork producers have enjoyed the 33rd consecutive month of profitability, which ties a 27-year-old record set from Dec 1976 through Aug 1979, and market signals currently point to a new record in November.

 

Key market indicators that support predictions that cash hog prices will remain profitable for average-cost producers include expanded hog processing capacity this year and December lean hog futures that closed Friday (Oct 27) at 64.60 cents per pound. That was up 12 points on the day and 5.25 cents higher on the week. Also, a gain of 9 percent in year-to-date export sales for pork and pork variety meats through August contributed to support.

 

The most recent calculations of the break-even level for hog producers conducted by John Lawrence, agricultural economist at Iowa State University, was at US$39.04 per hundredweight on a live basis. This calculation was for farrow-to-finish operations and based on hogs that were shipped from the farms in September. That figure converts to about US$52.00 on a dressed basis.

 

December futures hit a 6 1/2-week high Friday and closed at the highest level since Sep 12, which indicates that futures traders are confident that cash prices will not fall significantly in November, according to market analysts and industry sources.

 

An informal survey of market analysts conducted by Dow Jones Newswires for their views on whether cash hog prices in November will remain profitable for producers revealed an average confidence rating of 84 percent.

 

Glenn Grimes, agricultural economist at the University of Missouri, said higher corn prices will raise the break-even cost of production for hogs that will be shipped to slaughter in November and December. Rising corn prices could push the break-even cost up by about US$2 per hundredweight by December, but the odds are high that producers will still make money through the end of this year, he said.

 

Mike Zuzolo, analyst with Risk Management Commodities Inc of Lafayette, Indiana, gave an 85 percent probability rating for prices to remain profitable. He said downside risks for hog prices include the possibility of another sharp leg-up in corn prices, a severe slowing of the economy, or a decline in demand for US meats from emerging nations.

 

Dan Vaught, analyst with AG Edwards and Sons in St Louis, suspects that the industry has pulled some hogs forward based on average weights in Iowa/southern Minnesota during the past three weeks that have held below the year-ago levels. He predicts that the Chicago Mercantile Exchange's two-day lean hog index will likely remain above 60 cents per pound, but if its does slip below that level, it would only do so for a short period.

 

Cash prices at their lowest levels in the month of November should still remain above producers' break-evens by at least US$2 per hundredweight on a live basis, said Rich Nelson, analyst with Allendale Inc, based in McHenry, Illinois.

 

While hog producers have enjoyed an extensive period of profitable prices, there is much concern about what higher corn prices could mean for the industry in the years ahead, analysts and other sources said.