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46006

Time For Hog Expansion to Stop -- Economist

It's no surprise that hog profits are off from where they were last year, when the porcine epidemic diarrhea virus (PED) swept through the U.S. hog industry and left a cull-shortened herd and record prices in its wake.

The waters have calmed now, though, and recent data show hog producers have responded to calls from months ago to boost hog numbers, so much so that now the profit margin has shrunk, and industry-watchers are rescinding their calls to continue expansion in order to keep profits from sinking into the red.

The most recent Quarterly Hogs and Pigs report from USDA shows the U.S. herd has risen by 7% in the last year, with breeding stock rising by 2% specifically and market hog numbers up 8% from March 2014.

The numbers are mostly a reflection of post-PED herd rebuilding, a period during which producers saw record-high market prices despite meteoric growth in hog numbers. For a while, hog numbers couldn't go high enough fast enough. Those days are over.

"We have come full circle. More pigs coming to market in the first quarter than expected must have come from a larger breeding herd. Current marketing numbers have been averaging 10% higher. If the marketing herd is larger, then marketing numbers could continue to surprise the market on the high side, and hog prices will stay depressed. How will the current uncertainties of market supplies be resolved?" asks Purdue University Extension livestock economist and hog market expert Chris Hurt. "The current large number of hogs coming to market has caused cash prices and lean hog futures to be on the defensive. Moderation of these large numbers will be a requirement for price recovery. All indications are that the pork supply increases will remain high, but maybe not at the current rate that is up about 10%. If USDA Hogs and Pigs numbers are used as the best estimate of future supplies, then pork production will be up by about 7% in the second quarter, followed by an 8% surge in the summer quarter. The hogs for the last quarter will come from this spring's farrowings where producers indicated a 2% increase. The number of pigs per litter this spring is expected to be about 5% to 6% higher, resulting in pork supplies in the last quarter of 2015 being higher by about 7% to 8%."

Ultimately, these numbers mean profits per-head are likely to fall to around $2 through the remainder of 2015, Hurt projects. Though the rise in hog numbers will slow through the year, look for prices to gradually rise through about the 3rd quarter, then fall again in the 4th quarter.

"Current price forecast derived from futures prices for 2015 are for live hog prices to average about $51 per hundred pounds, down from the record high of $76 last year. My bias is that hog prices will recover some and post an average near $53. If so, projections by quarter would be around the following levels for quarters 1 to 4: $48, $54, $58, and $51, respectively," Hurt says. "With an average projected hog price near $53 per live hundredweight for 2015, costs are currently projected to be near $52 based on current feed price expectations. If so, this would mean a small profit of about $2 per head for the year, with the best of those profits in the third quarter and with small losses in the first and fourth quarters."

The net result of these numbers, then: It's time for expansion to stop. "These lowly expectations for positive returns should keep producers from making further expansion plans," he adds.

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