November 8, 2007

 

US hog farmers expand production despite break-even prices

 

 

Despite hog prices falling below the break-even point, hog farmers in the United States are expanding - not contracting - their herds, and are not expected to reduce production any time soon.

 

Hog futures prices on the Chicago Mercantile Exchange last week fell to three-year lows for some nearby contracts. Some producers were getting well below US$40 per hundredweight for their hogs this week against production costs of over US$50.

 

Albeit the drop, Iowa Extension Livestock Analyst Shane Ellis predicted that as long as US producers would continue to produce at below break-even level from six months to two years as long as they can cover their variable costs, such as feed and labour.

 

Steve Meyer, president of Paragaon Economics, agreed, saying most producers have strong balance sheets after four profitable years and they operate with more fixed than variable costs - a change since the last time prices were so upside down.

 

Analysts and the futures markets are both predicting prices next spring and summer that could put producers back in the black.

 

Nevertheless, about 500,000 more sows are still needed in North America to meet current demand, Brumm Swine Consultancy founder Mike Brumm noted.

 

While Canadian producers faced with a stronger dollar and higher feed and labour costs have already started reducing sow herds, USDA's latest Quarterly Inventory report showed US sow inventory actually increased slightly.

 

Canada's financial woes may just be driving more Canadian feeder pigs across the border as feeder pigs exported to the United States are up 8 percent from a year ago, while slaughter hog exports are up 18 percent, according to Christopher Hurt, an agricultural economist at Purdue University.

 

US hog slaughter in recent weeks has surpassed USDA forecasts and pushed processors to add Saturday shifts. Ellis noted that weekly hog kills have topped 2.3 million per week since the beginning of October against total capacity of about 2.5 million. He predicted kills would remain above 2.2 million per week until at least mid-December and possibly through Christmas, which is traditionally a high slaughter period.

 

The glut is driving down prices, giving processors more leverage, says Ellis.

 

Meanwhile, feedgrain costs and exports remain wild cards in how long pork producers can maintain current production levels. While no surprises are expected, USDA forecasts pork exports this year will be down about 1 percent after several years of consecutive increases.

 

The pork industry continues to expand for growth in the export market that has not occurred in 2007, warns Hurt.

 

Feedgrain costs also bear watching. While all eyes have been on ethanol-charged corn prices, analysts said soybean meal could be the one to watch. Already facing tight soybean inventories and growing export demand, any threat to the South American soybean crop could push up hog feed costs, squeezing margins further.