October 1, 2008
US pork industry faces uncertain times amid economic woes
A roller-coasting stock market is contributing to greater uncertainty not only for grain producers but also for livestock operations.
Chris Hurt, an agricultural economist at Purdue University, in his weekly outlook released Monday, said "after all, it is the incomes of world consumers that are the foundation of pork demand."
US consumers have been shaken, and the pork industry has never been so dependent upon the incomes of the world's consumers as pork exports have led prices higher. This brings into question the prospects for the industry in the coming year, said Hurt.
"Anticipation of smaller supplies should be supportive to hog prices," he said.
USDA’s quarterly hogs and pigs report released Friday suggests that US producers are following through on their intentions to reduce the breeding herd and cut production for 2009. The report showed the nation's breeding herd down 3 percent, and producers indicate they will cut farrowings by 5 percent this fall and another 3 percent in the winter.
"However, record weaning rates mean that supplies will not be down by the same percentage," Hurt said.
The number of pigs per litter will be nearly 2 percent higher in 2008 as extremely high feed prices have forced the industry to trim low-productive sows and encouraged management practices to save more pigs.
The rate at which pigs per litter grows is highly affected by feed costs. The last time the growth rate in pigs per litter was at 2 percent a year was in 1996 and then again in 1997 when corn prices moved above US$5.00 a bushel, Hurt said.
He said US pork production is expected to remain up about 3 percent in the fourth quarter before dropping 1 percent to 2 percent in 2009. Pork trade has been the outstanding feature of 2008. So far this year, pork exports have been up 71 percent, while imports are down 16 percent. The net trade (exports minus imports) has accounted for 18 percent of US production. Hurt said that compares with a net export trade at 10 percent last year. This means an additional 8 percent of US production is not available to US consumers because of trade. Given that domestic production is up about 7 percent this year, trade is the only reason hog prices were able to recover so sharply this spring and summer.
Several cracks in the bullish trade numbers have developed, however. China was by far the leader of added exports, representing 46 percent of the additional exports through July. The rate of exports to China dropped in July, leading to some concerns that sales may not be as brisk to China in the post-Olympics period.
Exports to Russia, which accounts for 13 percent of the growth in US exports in the first seven months, are in jeopardy as that country retaliates for US diplomatic criticism of Russia's incursions into Georgia. Still, Russian pork purchases represented only 2 percent of US production so far this year.
Hog prices, as measured by live values for 51 percent to 52 percent lean hog carcasses, are expected to average in the high US$40s to low US$50s for the fourth quarter of 2008, Hurt said. Prices are expected to be in the low US$50s this winter and move into the high US$50's to low US$60s in the spring and summer. For the calendar year of 2009, hog prices are expected to average in the mid-to-upper US$50s.
Current estimates of costs for 2009 are in the mid-US$50s, resulting in an estimate for modest profits for the year.
Feed prices remain highly unstable, so much uncertainty is added for pork producers from the feed cost side as well, he said.
Producers could pay about US$5.25 for corn in 2009 and still break even. This compares with a corn break-even purchase price of only US$3.75 a bushel for 2008. Since corn prices will average closer to US$5.00 a bushel, this means considerable losses in 2008 on average for producers.
The current difficulties for the US economy may see lower meat consumption given the uncertainty in their incomes, he said. Beef consumption will feel the impact much more strongly than pork since pork is much lower in price, he added.
For 2008, retail beef prices have averaged US$4.26 a pound, while retail pork has averaged US$2.90 a pound. In recent years, the level of consumer incomes has had little impact on pork consumption. However, pork prices can be expected to experience some negative reaction to consumer income uncertainty.
Hurt said that both crop and animal agriculture are ready for more stability, but it would not be forthcoming at the moment.
