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Higher corn to cut fall 2007 hog profits, analyst says

Agriculture.com Staff 10/19/2006 @ 1:46pm

Because feed makes up 60% of the costs to produce hogs, increased corn prices will cut into producer's profits, one livestock analyst said.

Ron Plain, University of Missouri livestock analyst, said that for each $0.10 increase in the price of a bushel of corn, that increases the cost of raising a slaughter hog by $1.00 per head.

In October, corn prices have been as high as $1.00 higher than a year ago, making hog production $10 higher per head more costly. "I don't think we're going to stay $1.00 higher on the corn all year, but I do see corn staying above $3.00 per bushel," Plain said.

U.S. hog producers have been enjoying a long period of profitability, one that high corn prices could put a halt to in 2007.

October makes the 33rd consecutive profitable month for hog producers, matching a 1977-1979 record. "I think we can run this up to 40 straight months," Plain said. "It's been a very good run for hog producers."

To produce a hog at break-even, prices needed to be between $39.00-$40.00 per hundredweight.

That break-even level could rise to $40.00-$42.00 into the winter. And then a year from now, a break-even range could be $45.00-$46.00, Plain said.

In effect, the market-ready hogs have already been eating cheap corn before the price run up. Hogs not ready for market until next summer will require the higher break-even price. "I think we'll see cash hog prices dip below the break-even levels in the early fall of 2007,” Plain said.

With many industry analysts suggesting that ethanol demand could keep corn prices higher going into 2007, livestock producers might consider hedging their feed supply. Since 1998, corn prices have averaged $2.10 per bushel. "I agree there will be far more price risk on the feed costs side of the ledger going forward," Plain said. "Livestock producers have had some pretty cheap corn in the last eight years."

Meanwhile, unlike grain farmers, livestock producers are less inclined to hedge their feed supply. Plain sees that changing in the future. "Trying to do things to manage feed price risks is going to become much more important than it has been in the past," Plain said.

In the past, higher corn prices were driven by crop weather failures, but the fundamentals have changed. For instance, following a short crop in 1995, a $5.00 per bushel corn market in 1996 was short-lived once that year's corn was harvested. The price of corn quickly dropped $2.00 by fall, Plain said.

"This time around, with increased corn demand to feed all of these ethanol plants, I'm looking for a much higher average price for corn," Plain said. "The ethanol demand is going to keep corn prices at a permanently higher level than what we are use to."

As a result, pork demand is going to be that much more important to the hog industry, Plain said.

Including 2006, the U.S. has had 15 consecutive years of record pork exports. The industry expects another export record for 2007.

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