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Hog market reacting to higher feed, economist says

With much higher feed prices, the pork prices have been going in the opposite direction. From mid-September through November 24, December 2006 corn futures rose $1.28 per bushel and December 2006 soybean meal futures increased $32 per ton.

Chris Hurt, Purdue University Extension economist said in a weekly article that lean hog futures prices have dropped since corn and meal prices have gone up.

December 2006 lean hog futures were down about $.50 per hundredweight but, June 2007 futures were up $7.27 and October 2007 have gained $9.40.

Why have the nearby futures dropped modestly, while the more deferred futures have moved higher? "Of course, the answer lies in the markets expectation that some modest sow liquidation could occur this fall and winter adding a bit to pork production," Hurt wrote. "However, both the current modest sow liquidation plus the cancellation of plans to expand mean that pork supplies may begin to decline, especially by the last quarter of 2007."

Hurt added, "Additional clues come from how pork producers have adjusted to high feed prices in the past."

There have been five previous periods when corn futures exceeded $3.50 per bushel. Those were in 1974, 1980, 1983, 1988, and 1996, according to Hurt. In contrast to this year, each of those was associated with a weather related short crop. Two of the years, 1974 and 1996 were also associated with periods of strong demand as is evident this year.

The higher corn prices led to pork producer losses in the year surrounding the high corn prices, except in 1996, the economist said.

Losses for the other four years averaged about $3.34 per live hundredweight during the year of high prices. In 1996, however, high corn prices came at a time when hog prices were also high and profits averaged about $4.00 per live hundredweight in the year surrounding the high corn prices.

Hurt explained how quickly hog futures recover after the sharp rise in corn prices. "For this analysis, consider the length of time from the peak corn prices until lean hog futures make their next high. On average, over the past five high corn price events, that has averaged about 20 months, but has ranged from as short as 10 months to as much as 36 months."

Hurt added, "A second observation is how much nearby lean hog futures prices increased from the month when corn futures prices peaked until lean hog futures finally made their high about 20 months later, on average. That answer was about $22.00 per hundredweight on average across the five events, but ranged from about $15.00 to $26.00."

The real question of importance is how will the pork industry respond this time?

"Everyone recognizes that this high feed price event is different," Hurt said. "Yields for the 2006 crop were near average and high prices are being driven by potentially vast new demands for energy from crops. Short production years tend to have peak prices for that year and then return closer to normal prices when the next crop replenishes supply. Now, no one can say just how high corn prices will go, and especially what the new normal price of corn will be in coming years."

This makes predicting how the pork industry will respond this time much more difficult, Hurt said.

Hurt pointed out that by using the historical averages from the previous five high corn price events, the next high on hog futures could occur in about 20 months. "From today, that would be the summer of 2008, which seems reasonable." If lean hog futures were to increase by the average of $22 from current nearby futures levels, that would put them up to $85. This compares with the $86.60 record high since hog futures began trading on a lean basis.

However, before pork producers jump for joy, they must remember that the history lesson also says a period of losses of at least a year tend to precede the movement up in hog prices. "It is now easy to identify 2007 and perhaps the first-half of 2008 as the period when producers are most vulnerable to losses. Unfortunately, that is a guideline based on history repeating itself. Given the uncertainties of this high corn price event, those guidelines could be on shaky ground," Hurt said.

With much higher feed prices, the pork prices have been going in the opposite direction. From mid-September through November 24, December 2006 corn futures rose $1.28 per bushel and December 2006 soybean meal futures increased $32 per ton.

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