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High corn trims hog herd gains

Jeff Caldwell 08/24/2011 @ 10:51am Multimedia Editor for Agriculture.com and Successful Farming magazine.

High corn prices are starting to really stress hog producers, and it's got some now wondering whether that industry can keep up in an environment of increasing competition for the grain that's out there.

There's no easy answer to the many questions surrounding the hog industry's ability to keep on pace with the soaring corn market, says Purdue University Extension livestock economist Chris Hurt. The first major factor is ethanol. That industry's going to use over 5 billion bushels of corn in the coming year, according to USDA numbers. That's a big chunk of the total U.S. crop and tightens the squeeze on the hog farmer, Hurt says.

"To meet the mandated domestic Renewable Fuels Standard (RFS) will require about 4.7 billion bushels with nearly 400 million additional bushels used to make ethanol that will be exported. The 5.1 billion bushels of mostly mandated usage is 39% of the 2011 crop," he says. "Mandated corn use was troublesome to the animal industries when corn was abundant. Now with short corn supplies, the concerns are even greater. Clearly use of 400 million bushels of a limited corn supply to produce ethanol to be exported to countries like Brazil is far beyond the intent of Congress in the 2007 energy legislation that established the current RFS. The short corn supply increases the odds that some end users, including the animal industries, will appeal to the EPA to consider exercising the emergency clause to reduce ethanol mandates for 2012."

But, say that doesn't happen; then what? It's clear the hole dug by the ethanol mandate will leave other users with a tighter market. Enter corn exports into the equation. Will they create any breathing room for the livestock sector?

"There has been a general assumption that foreign customers would reduce consumption as prices rise, however in 2007/08 foreign customers increased purchases," Hurt says. "Given the low value of the dollar and strong desire of many foreign governments to do what they can to moderate food inflation, the question remains whether the foreign sector will cut U.S. corn imports this year."

So, what's the magic price number that represents the difference between profit and loss for the hog industry? Though it's something of a moving target from farm to farm, Hurt says $6.65 is the current per-bushel target price. Once prices are much beyond that point, feed usage will have to decline.

"The current estimate is that producers could pay about $6.65 per bushel based on a U.S. average farm price for the 2011/12 marketing year and still meet all other costs. USDA’s August WASDE report forecast the U.S. average farm price between $6.20 and $7.20, with $6.70 being the mid-point of the range," Hurt says. "The corn futures market is now expecting prices above the $6.70 USDA mid-point and closer to $7.00 per bushel for a U.S. average price received. Corn prices above $7.00 per bushel would be required for the domestic livestock industry to cut back on usage."

In the longer term, that means any plans for herd expansion -- which has been in the realm of possible over the last year or so -- will probably be delayed at best. But, the good news is the trend won't go into the red based on current price estimates just yet, Hurt says.

"Pork producers were well aware of this season’s corn price uncertainty and have kept expansion plans on hold. Those decisions appear fortuitous now. Estimated farrow-to-finish margins for the 2011/12 corn marketing year now appear to be slightly negative, with an average loss of $4.00 per head. This potential loss is small enough to keep the industry at about the same size," he says. "An alternative way to say this is that corn and meal prices above current levels could cause the industry to begin to shift toward moderate liquidation."

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