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Pork producers brace for flood of red ink
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
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
"You're going to sell hogs for more money than ever, but you might not get
to keep any of it for paying bills," Meyer said at the Expo. That's
because of the price of feed. He ticks off all of the issues that are pushing
corn prices ever higher this spring: drought in the Plains with 60% of the corn
in Texas rated poor or very poor right now; delayed planting issues and cool
spring weather; floods nearly everywhere in the Midwest with another half
million acres underwater this week along the Missouri River; growing demand for
feed in nearly every emerging world market.
"Ethanol will compete for corn regardless of what happens on the policy
front," Meyer says. "The plants are built and the infrastructure is
in place, that's not going away. Ethanol now uses 37% of the corn crop, just
about equal to feed and residual uses. Feed is really the only rationer of the
corn crop, ethanol will stay the same, as will exports. We'll ration out the
rest of it for feed use." He says the current forecast is for corn to
average $6 to $7 a bushel in the next year, with that number ratcheting up with
every new weather report. Soybean meal will average $375 to $405 a ton.
"If you have a chance to buy corn with the number 5 at the front of it,
and soybean meal in the low $300s, you better do it," he told the hog feeders.
These price forecasts would say that the average cost of grow hogs in the next
year will be a little over $90/cwt (carcass basis).
Average losses for pork producers so far this year are about $3 per head, Meyer
says. He expects that number to average a $12 loss in the coming year. That's
certainly no incentive for anyone to expand in hogs, but it isn't incentive to
cut back either, as long as fixed costs are being met. "That could change if
something forces those losses to $20 a head by this fall. That would push some
Meyer said that hog prices peaked about two months ago at
$95/cwt., and have now backed down to about $90. "Some people had
predicted $100 this summer, but I don't think we'll see it, I think we'll stay
at $90-$95. The highs we made in April, we may take them out in August. I think
we'll stay in that same range ($90-$94) in the third quarter, then drop into
the $80s in the fourth quarter and the first quarter of 2012."
Meyer also told the pork producers that the corn ethanol co-product, dried distillers' grains, is priced very competitively to corn now.
"You need to be feeding DGs at the maximum level recommended, it will save you money right now."