Are hog profits on their way back around?
A while back, hog profitability was seen as just over the horizon. Then, the drought hit, sending feed costs through the roof and all but gutting profitability on most of the nation's livestock farms. But those feed prices have been slashed since USDA saw higher corn and soybean stocks on hand in the U.S. Now, that's got one respected livestock economist cautiously optimistic that, if those feed costs stay low, a return to profitability could again be in the cards.
"Lower feed prices have sharply reduced anticipated feed costs for this spring and summer. Estimated costs for farrow-to-finish production were near $70 per live hundredweight in the first quarter of this year. Now my cost estimates have fallen to $65.50 for the second quarter and to $63 for the third quarter," says Purdue University Extension livestock economist Chris Hurt. "The outlook early in 2013 was for a return to breakeven based on a hog price rally by May to reach the $70 cost level. Weakened demand related to exports meant that the spring rally would not be strong enough. Now, the outlook has shifted toward costs decreasing from $70 to the mid-$60 as the way breakeven could be reached a bit later this spring."
But, the return to profitability hinges on 3 big factors between now and late spring/early summer:
Feed costs. This concern's not going away anytime soon, Hurt says. "The biggest of the worries will remain over feed costs. While the recent USDA Grain Stocks report seemingly 'discovered' more old-crop corn and soybeans, those reports have swung sharply between bearish and bullish in recent years," he says. "There is little assurance that this latest report has the correct magnitude of remaining old crop supplies."
Spring/summer weather. Already off to a sluggish start because of cool, damp planting weather, this year's corn crop will need to average closer to trend yields to ensure feed costs stay within a reasonable range. "If U.S. yields do return to near-normal, it is likely that stocks would build and provide some cushion against the next small crop. If this were to occur, not only would feed prices move lower, but there is a higher probability of prices staying lower and less volatile for multiple years. This would be a favorable business environment for all animal industries to move toward expansion," Hurt says. "Feed price uncertainty remains very large. Feed prices by mid-summer could be much higher, much lower, or about the same as they are today."
Export demand. Hurt says his shift to a slightly brighter profit outlook is "skating on thin ice," and how thick or thin that ice gets depends on whether export demand can rebound. "Concerns over further erosion of pork exports remain. Japan, our largest pork buyer, has recently announced a major move by their central bank toward quantitative easing that will depress the buying power of the Yen relative to the dollar," he says. "This will make it more costly for Japanese consumers to buy U.S. pork."