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Red ink for pork

08/31/2011 @ 3:21pm

Hogs are not known for their swimming ability. But they will have to learn quickly how to tread water in 2011. Next year, they'll be lucky to keep their snouts dry.

That's the message Steve Meyer of Paragon Economics delivered to pork producers at the 2011 World Pork Expo. He told them that for most of the next year, all they'll have to do is look at the futures market to see they'll be feeding corn that costs at least $7 a bushel, a number unheard of up to this point.

As the next year progresses, supplies of pork and competing meats may increase, putting pressure on prices and consumer demand. The result is red ink may drown some producers. Meyer runs down key factors affecting the hog market this year.

Demand for meat

We need a growth in GDP, jobs, and income, plus more normal spending patterns, more savings and less debt, and a housing recovery,” Meyer says. “Those would all be signs we're in recovery. And they are all happening to some extent, except for the last one. Consumer confidence is low, and it is closely related to unemployment and job growth.”

Pork demand is up 2.1% in the last year, however, with the growth in retail prices mostly responsible.

As for beef, the last three calf crops have been the smallest in history. Shrinking beef supplies will kick in later this year and next. It will be at least a couple of years before the beef herd can begin to expand – if it can muster the resources to do so. In the meantime, pork benefits from lower beef supplies and the highest beef prices in history.

The falling value of the U.S. dollar in currency markets helps U.S. exports, and that has certainly been good for pork.

“Pork exports were up 19% in the first quarter of this year, and the value was up 28%,” Meyer says. “I expect us to beat the 2008 record for pork exports this year. That's a real boon for pork demand.”

Costs of production

You're going to sell hogs for more money than ever, but you might not get to keep any of it,” Meyer says.

That's because of the price of feed. He ticks off the issues pushing corn prices ever higher this spring: Drought in the Plains; delayed planting issues and cool spring weather; floods nearly everywhere in the Midwest with another half million acres underwater along the Missouri River; and growing demand for feed in nearly every emerging world market.

“Ethanol will compete for corn regardless of what happens on the policy front,” Meyer says. “The plants are built and the infrastructure is in place – that's not going away. Ethanol now uses 37% of the corn crop, just about equal to feed and residual uses. Feed is really the only rationer of the corn crop; ethanol will stay the same, as will exports. We'll ration out the rest of it for feed use.”

The current forecast is for corn to average $6 to $7 a bushel in the next year, with that number ratcheting up with every new weather report. Soybean meal will average $375 to $405 a ton.

“If you have a chance to buy corn with the number five on the front of it and soybean meal in the low $300s, you better do it,” he says. These price forecasts would say that the average cost to grow hogs in the next year will be a little over $90/cwt (carcass basis).

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