Grain prices slow hog herd growth
The continued decline in South American soybean crop output expectations, like the one released Tuesday, have implications for more than just the grain markets. Though it's been poised at the brink of an upswing in profit potential, the U.S. pork industry seems to be cautiously riding out feed costs that have surged in the last couple of weeks in hopes that earlier-estimated expansion can happen.
"The nation’s pork producers are largely holding back on expansion even though the industry returned to profitability in the spring of 2011. However, higher feed prices in the past few months as a result of crop damage in South America has increased costs and reduced the profit outlook for 2012," says Purdue University Extension livestock economist Chris Hurt. "Higher feed prices due to lost crop production in South America have reduced 2012 profit prospects from what they were a few months ago."
Right now, that profit's pegged at right around $4 per head, Hurt says, about $10/head lower than a year ago. That's got herd expansion slowing up, though that trend may reverse in the next few months.
"An early look toward 2013 suggests some modest continued expansion of pork production with somewhat lower hog prices," Hurt says. "Feed costs are expected to moderate to the downside with estimated total costs dropping to around $60 per live hundredweight compared with $63 in 2012."
What else is behind the lagging expansion? Supplies are rising but exports are expected to continue to surge, helping buoy demand that likely won't slide much anytime soon, Hurt adds. Despite these variables, producers face a lot of uncertainty in other sectors that don't make expansion the easiest move.
"There are several reasons, starting with the large financial losses in 2008 and 2009 that depleted balance sheets. The second is the uncertainty associated with feed prices, including both corn and soybean meal, after unfavorable weather began to reduce South American crop production in mid-December," Hurt says. "Since that point, May 2012 corn futures have increased by about $.60 per bushel and May soybean meal futures have increased by nearly $100 per ton. Together these have increased feed costs by about $6 per live hundredweight with each contributing roughly $3 to higher costs. Pork producers are also aware that 2012 U.S. crops have a high production potential, but also realize an unfavorable growing season would threaten that potential."
Overall, Hurt says the breeding herd is just slightly larger than it was a year ago, though that modest growth, too, likely won't keep up. "The greater increase in market hogs versus the breeding herd is the result of continued increases in the number of pigs per litter," Hurt says. "Producers also indicate they will modestly reduce the number of sows farrowing in coming months. Farrowing intentions are down about one percent for the spring quarter and down 2% for the summer quarter. If intentions materialize, pork supplies will only increase by about 1% in the fall of 2012 and early 2013."