August 25, 2010

US hog farmers warned against strong grain prices

Robust grain markets should prompt hog producers to think twice before being lured by record pork prices into expanding their herds, analysts have warned.

The rebound in live hog prices, which have jumped about 80% over the past year in Chicago, has defended livestock farmers against the surge in the price of feed grains, even with corn back over US$4 a bushel.

"Right now profits are not threatened," said Chris Hurt, Purdue University farm economist, adding that farmers could afford to pay nearly $6 a bushel for corn before being faced with a return to the losses they racked up for two years before moving back into the black in the spring.

Herd cutbacks prompted by the sector's slump, coupled with improved demand for meat fostered by a recovery from economic recession, have been seen as behind the rise in pork prices to a record $95.67 per hundredweight, according to USDA data.

However, futures markets portrayed a less profitable scenario for producers in a year's time, with forecasts of higher hog production depressing live hog prices to $48 per hundredweight, some 20% below current values.

While it was possible that hog prices would turnout higher than markets were currently pricing in, the same could be true of grain values.

"No one knows what the new normal will be for corn and other feed prices," Hurt said, noting that corn had averaged about $2 a bushel between 1999 and 2005.

US and world corn production has achieved record high levels in both the 2009-10 and 2010-11 marketing years. Yet consumption has been even larger and stocks have been drawn down, he said.

The pork industry has to remain cautious about expansion, he added, warning of the wide swings in margins that result from changing livestock and feed prices.