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Pork profits hinge on 2013 corn, soybean crops

As the global hog industry converges in Des Moines, Iowa, for the annual World Pork Expo this week, there's a new profit outlook that shows Mother Nature is in complete control of whether or not the business climbs out of the red ink for the remainder of this year and into 2014.

Hog prices have gone from the mid-$50s to the lower $70s (per live hundredweight) in the last three months after feed prices moderated earlier in the spring. That trimmed total production costs about $3/head based solely on feed costs. It's injected some black ink into the business, says Purdue University Extension livestock economist Chris Hurt, but it may not last. Mounting concerns about corn and soybean planting delays, their potential implications to ultimate crop size this fall, and how much it will cost hog farmers to procure that grain for feed have Hurt anticipating those profit margins getting squeezed to near or south of the breakeven point, keeping herd expansion plans on the back burner.

"Delayed planting that is raising concerns about fewer planted acres and reduced yields has most recently sent corn and meal prices trending to the upside, raising concerns that hog production costs will not drop as much as some had anticipated," Hurt says. "Prices for corn and meal are expected to drop sharply into the late summer and fall as markets make the transition to new-crop supplies. Current forecasts are that fourth-quarter corn prices will be $1.25 per bushel lower than third-quarter prices, and soybean meal prices will be $40 per ton lower. That means costs will drop from about $67 per live hundredweight this summer closer to $60 for the final quarter of the year. Hog prices are expected to be near the $60 level for the final quarter of 2013 and first quarter of 2014, thus continuing breakeven conditions."

There are conflicting price outlooks for all of 2014, though. First, USDA -- whose outlook came back in early May when corn and soybean prices were seen lower than current expectations -- saw hog prices running in the $56 to $60/CWT range. But as feedstock prices started to firm, it led to an outlook today that Hurt says is more in the $62 to $63/CWT range.

"The midpoint of the USDA 2013/14 marketing year U.S. corn price was $4.70 per bushel with high-protein Decatur meal prices of $300 per ton. In contrast, futures markets never were that low and currently are roughly $5.60 per bushel for corn and near $400 per ton for Decatur meal," Hurt says. "These substantially higher feed costs would be expected to keep the pork industry from expanding and result in hog prices more in line with current lean hog futures prices."

Expansion is the big endgame of this equation, and as Hurt says, the current outlook should put off expansion once again. The first cue as to whether it can start to happen will come once this year's corn and soybean crop sizes begin to crystallize.

"Hog producers generally should keep any expansion plans on hold awaiting better clarification of the size and prices for 2013 crops and the implications for hog production costs," Hurt says. "The size of those crops should be more transparent in another 60 days, although late-planting likely means that frost will also be a threat for much of the month of September."

If the window for expansion does open, how much should occur? Keep an eye on those grain prices, Hurt says.

"In general, if corn prices stay below $6 per bushel, the pork industry will be able to survive another year of low crop production. Corn prices above $6 would push the outlook back into losses. The opposite would be true of $5 or lower corn prices. Some expansion could be expected with low $5 corn prices and a more aggressive expansion would be expected with corn prices dropping below $5," he says. "Expansion, if it occurs, is not expected until the fall. Retention of additional gilts at that time to expand the herd means pork supplies would begin to increase late in the summer and fall of 2014. For now, industry losses have come to an end, and pork producers are keeping a close eye on weather just like their crop-producer cousins."

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