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Pork producers brace for flood of red ink

06/10/2011 @ 8:43am

Hogs are not known for their swimming ability. But they will have to learn quickly how to tread water in 2011. Next year, they'll be lucky to keep their snouts dry.

That's the message that Steve Meyer of Paragon Economics delivered to pork producers this week at the World Pork Expo in Des Moines. He told them that for most of the next year, all you have to do is look at the futures market to see that they'll be feeding corn that costs them at least $7 a bushel, a number unheard of up to this point in history. And as the next year progresses, supplies of pork and competing meats may increase, putting pressure on prices and consumer demand. Net result: red ink that may drown some producers. Here's Meyer's rundown of the key factors affecting the hog market this year.

Demand for meat

"We need a growth in GDP, jobs, and income, plus more normal spending patterns, more savings and less debt, and a housing recovery," Meyer said. "Those would all be signs that we're in recovery, and they are all happening now to some extent, except for the last one. Consumer confidence is low, and it is closely related to unemployment and job growth."

As for pork demand, it's up 2.1% in the last year, he said, with the growth in retail prices mostly responsible. "When the numbers come out soon, I think they will show that we set a record in May for retail pork prices, breaking the record we set last fall." Chicken is still relatively cheap, and supplies are increasing. "The chicken companies have been losing money since last fall, but they haven't cut back until recently," Meyer said. "There will be lower poultry supplies by this fall, and higher chicken prices to consumers."

As for beef, Meyer reminded the hog producers that the last three calf crops have been the smallest in history. Those shrinking beef supplies will kick in later this year and next. He thinks 400- to 500-pound calves could reach as high as $1.80-$2.00 a pound this fall, and fed cattle will be $1.15. It will be at least a couple of years before the beef herd can begin to expand - if it can muster the resources to do so. In the meantime, pork benefits from lower beef supplies and the highest beef prices in history.

The falling value of the U.S. dollar in currency markets helps U.S. exports, and that has certainly been good for pork. It is seen as cheap in Asian markets. "Pork exports were up 19% in the first quarter of this year, and the value was up 28%," Meyer said. "I think that may have slowed in April and May, but I still expect us to beat the 2008 record for pork exports this year. That's a real boon for pork demand."

Costs of production

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