Winter hog markets
The winter months can be the worst time of the year for hog prices. This year is expected to be no different. Seasonally, the winter fundamentals include the highest of the year hog slaughter amounts and heavier weights. This results in high pork supplies and lower hog prices.
To be sure, history shows that hog producers have lost money in each of the last four winters. Last winter, a 265-pound hog, on average, was worth $56 per live cwt, while the producer's break-even price was $58 per live cwt.
In the last 10 years, records indicate that producers were profitable three times in the month of December, two times in the month of January, and five times in the month of February.
“The bottom line is producers lose money in the winter because we, as a country, have a lot of hogs to sell in those months,” says Ron Plain, professor of agriculture economics at the University of Missouri.
In September, the USDA projected the number of hogs and pigs on U.S. farms increased 1% from a year earlier. As a result, the market looks at this data with bearishness, as it points to larger winter supplies.
Due to demand uncertainty and the high prospects for a U.S. recession-like consumption atmosphere, winter hog prices are expected lower than the 2011 summer highs of the upper $70s. With producers needing at least $66 to break even, this winter's average hog prices are seen around $62 per live cwt, Plain says. “We hope the producers can make enough money in the spring and summer to cover the losses in the winter. The major challenge for the 2011-2012 winter months will be feed costs.”
As a result, the U.S. livestock and poultry numbers have been downsized significantly this year due to increased corn prices and severe droughts.
In fact, due mostly to fewer cattle, the USDA sees 4% less feed usage in the 2011-12 corn-marketing year that runs between September 1-August 30. Normally, less feed usage means higher supplies of corn for other uses.
Though USDA is forecasting lower exports of corn and less corn being used for ethanol production, increased September corn exports has helped underpin the U.S. corn market.
Over the years, U.S. livestock producers have been getting better at pricing ahead of their feed costs, namely, soy meal and corn. However, the grain futures prices have stayed sharply higher so long that it's harder and harder to escape out-of-this-world feed prices.
“What hog producers were feeding in August and September was bought earlier on. They didn't pay $7 per bushel for it. However, when cash and futures prices got above $7 this year, producers probably had to pay that price and will be feeding that expensive corn this winter,” Plain says.
Record prices in the 2011 summer months created optimism for producers. In addition, the USDA is projecting record pork exports at 4.9 billion pounds.
Even though half of the world's hog population is in China, signals indicate that country will buy more foreign pork in the future. Currently, China is the fifth largest buyer of U.S. pork, behind Japan, Mexico, South Korea, and Canada. In 2011, China has bought the second most U.S. pork it ever has, second only to 2008.