June 11, 2007

 

World Pork Expo: Seasonal US output more even but prices still swing

 

 

Changes in the structure of the US pork industry's production sector over the past several years have reduced seasonal variations in slaughter-ready hog supplies but volatility in prices remains.

 

Glenn Grimes, agricultural economist at the University of Missouri, presented the results of the latest pork industry structure study here Thursday at the World Pork Expo. This was the 12th such study since the initial one was completed in 1973.

 

Grimes said John Lawrence, agricultural economist at Iowa State University, also contributed to the study. The producer interviews and surveys for the latest survey were completed in late 2006, and the data were compiled this spring.

 

On the conference sidelines, Grimes told Dow Jones Newswires that despite high corn prices, producers remain optimistic and are moving ahead with intentions to expand but at a controlled and manageable rate. They are making business decisions based on their profitability, ability to gain financing and intentions to be in production for the long haul.

 

Although production is now more consistent throughout the year due to better technology and with nearly all of the hogs being raised indoors, there is and likely always will be some variation in output because of the physiological nature of swine, he said. The animals do not gain weight as well during the summer which slows their overall performance and reduces the number available for slaughter.

 

There are also more breeding problems during the heat of the summer although most producers have compensated for that by housing the animals in controlled environment facilities, breeding additional sows and gilts during that period and using artificial insemination.

 

Slaughter hog prices have tended to follow the historic seasonal trends--higher in the late spring and summer and weaker during the fall and winter--even though production has become more consistent through the year, Grimes said. He said the reason for the variation in prices appear to be due to a change in the elasticity of demand. The elasticity index represents the relative change in price for a 1 percent change in supply, which for live hogs in recent years has been 0.2.

 

This means that for each 1 percent change in supply, prices move 5 percent in the opposite direction, he said. Prior to the mid 1990s, the elasticity index was consistently around 0.5, which meant that a 1 percent change in supply resulted in a 2 percent adjustment in price. So, a greater change in prices is occurring for each 1 percent adjustment in supply.

 

He said the transition of the packing industry to mostly two-shift operations and larger plants is likely to have caused this shift in elasticity. The plants need the hogs to run efficiently and they have less flexibility on a daily or weekly basis than did the more numerous but smaller single-shift operations. Therefore, they are more aggressive buyers when short on supplies but prices also can drop faster when they are full.

 

Production more concentrated into big hands

 

The 2006 study showed that the large and very large hog producers, those that market 10,000 or more hogs per year, again grew in number and by percent of total hogs slaughtered from the previous survey completed in 2003. The biggest increase in production occurred at operations that market 50,000 or more per year. Last year, that group of 191 operations accounted for 65 percent of the US hog slaughter.

 

Twelve years ago, there were only 66 producers that marketed 50,000 or more head, and they accounted for just 7 percent of the total slaughter. There were 18 more of these very large operations in 2006 than in 2003.

 

In the producer opinions and attitudes portion of the survey, a majority of swine operations of all sizes indicated intentions to hold steady or increase production during the period 2007 through 2009. A majority of the very large operations, with 500,000 or more hogs marketed per year, plan to boost output.

 

However, Grimes said if corn prices remain very high, the planned growth is not likely to occur unless there is significant growth in demand.