Hog expansion: Where, when & how?
Feed costs, weather and expansion possibilities. As the world's hog industry comes together this week for the annual World Pork Expo, those are the topics that will likely make their way around a lot of trade show booths, seminars and farmer discussions.
The hog industry's seen its share of volatility in the last year, with volatile feed cost swings feeding apprehension among producers about whether it's time to expand herd numbers. Just a few months ago, corn and soymeal prices were running high, making herd expansion less attractive. But now, as grain prices slip, there's growing talk of a 2% to 3% growth in the U.S. herd. But, will it continue to pay?
Cost of production is about $63.50/CWT right now, says Purdue University Extension livestock economist Chris Hurt. That's been bouncing around and will likely continue to do so, following the basic hog cycle, through the next year before landing at just over $60/CWT as the year's average.
What's that mean for profits? Hurt says the latest numbers point to a likely $8/head profit for the remainder of 2012 moving toward a $5/head level next year.
There's a lot of wiggle room in these numbers, Hurt says. It all boils down to feed costs.
"If we drop back to $5.15/bushel, that is a really important boost to potential profitability on the hog side. Could that be a dollar higher? Sure," Hurt says. "There is some real possibility that the next 2 months is not going to be moving corn price lower, but that we are actually crossing a threshold toward a longer-term period of lower corn prices and we'll be talking longer-term about $4.50 to $5.50 corn. We won't be talking about $8 corn.
"That's largely based on the fact the single biggest driver of higher corn prices has been ethanol use. That's leveled off. And, we've hit the blend wall, so we won't be using much more corn," Hurt adds. "Corn ethanol exports were very strong last year -- we're anticipating we will not sell as much ethanol in the export market."
That's if -- and right now, this is a big if -- the U.S. corn crop makes a reasonable yield this fall. Get below around a 160/bushel average nationally and it could add a dollar or more to Hurt's projected $5.15/bushel corn price for 2013. Then, expansion suddenly isn't as attractive a prospect.
"If we should see yields drop below 160 bushels for corn, then we see a good bit of upside in corn prices," he says.
Just as important to when the hog herd expansion starts is where that growth will happen. Hurt says North Carolina's got the most potential for growth with a lot of vacant buildings after that state's herd has seen the largest reduction in the country recently. But, there's a moratorium on new farms there, Hurt says, meaning any growth there may spill over into the eastern Corn Belt.
"We have seen North Carolina companies coming to the eastern Corn Belt. We may still have pigs moving to Indiana and Ohio. It's them getting around the moratorium," he says. "There's capacity in North Carolina, but some of that capacity is just going to be shut down now."
There's room for growth in North Carolina, but there's also excess capacity in northwest Iowa, southern Minnesota and southeastern South Dakota. And not just buildings and farm sites, Hurt says. Larger farms will be looking to grow in areas where the infrastructure's such that it can be a quick transition.
"The first thing for expansion is where there's excess capacity. Things like feed mills tend to be excess capaccity," he says, adding it's likely to be the larger farms that expand. "Northwest Iowa, southern Minnesota and South Dakota have a tremendous crop so far, and that could have a big influence. Our farmers in Indiana are looking at 3/1 of an inch of rain over the last 3-4 weeks and they're scared. They don't want to expand their herd. The crop looks great in northwest Iowa, though, and that can sure change your perspective."