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Heat melting away hog expansion plans

About three months ago, hog farmers and pork industry leaders had reason to be cautiously optimistic about profitability returning to their business . . . with one catch. Now, that catch has turned into a tripwire that's again taken down the optimism of earlier this summer.

In early June, Purdue University Extension livestock economist Chris Hurt said hog profits would likely trace the progress of what was then still thought to wind up a bumper corn and soybean crop. But that was during the normal spring planting time frame, and there was optimism that bumper crop could reach fruition.

Fast-forward to today, when much of that optimism has been replaced by anxiety about a late-developing crop maturing in bone-dry, baking conditions. In other words, Mother Nature's dashed the hopes she created this spring and early summer. And, the hog industry's following the crop situation; the prospect of a shorter crop and continued higher prices for feed has the hog outlook less rosy.

"Just when it looked like hog production was headed safely back to profitability in 2014, hot and dry weather late in the growing season has threatened the bright outlook. Rapid increases in feed prices have raised expected costs nearly $5 per live hundredweight from their lows in early August," Hurt says in a report this week. "This has not wiped out the profit potential, but should make hog producers more cautious about expansion. Expansion needs to be constrained to no more than a 3% increase in the breeding herd over the next year."

Hurt's new outlook isn't a death sentence for profitability, though. It's still possible, though margins that were wider are now tightened.

"While the cost outlook has risen, the hog price outlook has not increased proportionally to feed prices. Expected margins have narrowed but not collapsed. Starting with a cost of $59 per live hundredweight, current forecasts of hog prices will cover those costs. Prices this fall and winter are expected to be around $61, rise to $65 in the second quarter of 2014, and then drop to about $62 for a third-quarter average," he says. "That makes the average over the year spanning the fourth quarter of 2013 through the third quarter of 2014 about $62.50 and provides an expected profit of about $3.50 per hundredweight, or nearly $10 per head."

The pared-back profit outlook likely tightens the lid on potential herd expansion, too, Hurt says. That's going to help keep pork prices at profitable levels for now unless producers go overboard with growth. Doing so would take things back into the red, Hurt says.

"Given the current outlook for hog and feed prices, a relatively small breeding herd expansion could increase pork supplies to a level that would push the industry back into losses starting in the fall of 2014. A 2% to 3% breeding herd expansion would be expected to push the industry back to breakeven," he says. "When all of these factors are brought together, it means that the industry should strive for a modest expansion. Advice to individual pork producers at this point is to limit expansion to 2% to 3%."

But any price movement and subsequent expansion potential will continue to ride on the shoulders of the grain markets, where volatility is driving the bus right now and will likely continue to do so for the foreseeable future, both at home and abroad.

"World corn and soybean markets were expected to make some progress this year toward increasing carryover inventories. If inventories could be increased, that would then bring lower feed prices and less volatility," Hurt says. "The current hot/dry spell in the U.S. brings that hope into question and reminds us that feed prices will remain volatile until actual progress is made toward world production exceeding world usage. While the odds for the U.S. to contribute to that goal have been lowered in recent days, Southern Hemisphere production could move in that direction this winter, especially for soybean meal."

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