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July 8, 2002

Economists: Poor prices could hog-tie pork producers again

WEST LAFAYETTE, Ind. – Pork producers are about to take another one right in the snout.

Three years after the worst economic period in recent hog industry memory, producers could once again be in for a lot of financial pain. An oversupply of pork, combined with weak demand and an influx of imported pigs, threatens to send prices cascading this summer and fall.

Market signs are not encouraging, said Purdue University agricultural economists Chris Hurt and Ken Foster. They advise producers to prepare now for the tough times ahead.

Live weight prices could average $10 a hundredweight less this year than in 2001, said Hurt, a livestock market specialist.

"We're currently looking at prices that will be in the mid- to higher 30s this summer," he said. "That's a sharp contrast to what we thought would be prices well into the 40s and some good periods of profitability.

"Then, the real concerns come this fall. We're looking at prices that could drop back into the high 20s or very low 30s, especially in October and November. Prices in the first half of 2003 are likely to be only slightly higher, at an estimated average of about $34."

It all adds up to an average price of about $35 to $36 for 2002, Hurt said.

"We can compare that with the very devastating financial years of 1998 and 1999," he said. "Those years we averaged just a little over $33. So 2002 is feeling much more like those devastating years than it has in 2000 and 2001, when we averaged about $45."

The bad news doesn't end there. Rising feed prices could lead to further losses for producers.

"The Eastern Corn Belt's corn and soybean crops were planted late, and the dry, hot weather of early summer is causing feed prices to escalate," Hurt said. "The worst possible situation for pork producers would be to have depressed hog prices this fall and winter and higher feed costs."

Such a blow could be the knockout punch for some producers, he said.

A year ago, prices were above $50 a hundredweight. Entering 2002 many market analysts figured producers would make money, or at least avoid losses. Instead, the market turned sour.

What happened? A few familiar culprits and a couple of new factors, Hurt said.

"We've seen our supplies of pork be higher than what we'd anticipated," he said. "We continue to see quite a large number of hogs coming out of Canada. I think we also have to say that it seems like demand has been weak.

"Maybe demand has been weak because we've had a lot of beef in the system. We've also had very high poultry supplies. Back in the spring we saw the Russians restrict our broiler exports, and that caused a backup in U.S. markets."

Canadian producers are expected to export 6 million hogs to the U.S. this year, representing 6 percent of the total U.S. slaughter, Hurt said.

Storage stocks of pork, beef and broilers each are about 30 percent higher than a year ago, and retail prices have been slow to reflect the oversupply, he said.

As supplies remain abundant, inventories at Indiana hog operations are unchanged from a year ago. Hoosier producers had 3.15 million hogs on June 1, according to the Purdue-based Indiana Agricultural Statistics Service (IASS). Market hogs were up 1 percent from June 2001, at 2.82 million head. However, breeding herd numbers were down 6 percent, to 340,000, the IASS reported.

Nationwide, U.S. hog and pig inventories were estimated at nearly 60 million head on June 1, a 2 percent increase from a year earlier, reported the U.S. Department of Agriculture. Market hog numbers also were up 2 percent. The size of the breeding herd was unchanged from a year ago.

"We're swimming in big supplies at a time when demand is not real strong," Hurt said.

While they might be helpless to move markets in a positive direction, pork producers can take charge of their own financial destinies, said Foster, a Purdue livestock management specialist.

In financially stressed times, producers must take steps to improve cash flow in other farm operations or enterprises, Foster said.

"Typically we would say that they should try to reduce costs, but the reality with most of our pork producers is they're still up against the wall in an equity position from 1998, so their costs are already pretty low," he said.

"We're really looking at some nonfarm or nontraditional sources of income to get us through this. Maybe that means somebody in the family takes an off-farm job. It might mean liquidating some assets – inventories, cash assets or equipment – to try to generate some income in the short run. Producers might crank up throughput on some inputs they've got, using machinery to do custom work or renting it out to someone else. Or they might just try to push more animals through an existing facility."

Producers should not hold onto animals and wait for the market to rally. The added weight when hogs are sold will only exacerbate the supply problem, Foster said. Most hogs go to market at about 260 pounds, depending on weight incentives from meat packing plants, he said.

Those producers contracted to supply packers might be best suited to survive depressed price periods, Foster said. Others could find themselves without a place to sell their animals.

"Unfortunately, the people that are at most risk are those who are not aligned with anyone, either through a contract or some sort of marketing agreement," he said. "Those are the people who are going to be the easiest for the packing plants to put off in terms of slaughter space. That's been the trend in the industry."

Foster offered producers other tips for weathering the possible future economic storm:

• Explore ways to earn additional money from grain, if crops are a part of the farm operation. This spring's late-planted corn and soybeans could present pricing advantages for producers with good crops.

• Shop around for better deals on hog feed and take another look at animal rations. Hog size and meat quality doesn't necessarily suffer if feed amounts are altered. Also, producers may consider mixing special rations themselves – especially those rations for baby pigs – instead of hiring it out.

• Refinance farm loans. "This needs to be done in the next 6-12 months, since you may find it difficult repaying some short-term debt," Foster said. "You may need to increase your collateral, such as pledging land as security, but don't put too much behind the hog operation if you're not committed to it."

For producers who've been thinking of getting out of the hog business, the sooner they exit, the better, Foster said. Additional delays could cost money.

"On the other side, if you have breeding stock, the prices you'll receive for them won't be great," he said. "Ideally, you'd sell out during a high price time. But it's better to get out now than six months from now."

Regardless of which management strategies producers choose, profits likely will be slim, if realized at all.

"Margins are narrow, even in the best of times in the pork industry," Foster said.

"If you take a fast-food restaurant approach to this business, then it says, 'I make a little bit on every pig, so I have to have a lot of pigs to make an income.' At the same time, that puts you at more risk when there are losses in the industry. That means you're going to lose even more. So size works both ways – for you when there are positive margins and against you when there are losses."

Additional information pork producers may find helpful can be found in the following Purdue Extension publications:

• FF-5, "Income Enhancement Strategies for Farmers," by Foster and Mike Boehlje, agricultural economist. It is available online.

• FF-6, "Strategies for Dealing with Agricultural Lenders," by Foster and Boehlje. It is available online.

• FF-8, "Managing in Times of Financial Stress," by Foster and Boehlje. It is available online.

• FF-14, "Feed Management Considerations," by Brian Richert and Tip Cline, swine specialists. It is available online.

• FF-31, "Pork Contracting Considerations," by Foster. It is available online.

Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu

Sources: Chris Hurt, (765) 494-4273, hurtc@purdue.edu

Ken Foster, (765) 494-1116, kfoster@purdue.edu

Ag Communications: (765) 494-2722; Beth Forbes, bforbes@aes.purdue.edu; http://www.agriculture.purdue.edu/AgComm/public/agnews/

Related Web sites:
U.S. Department of Agriculture Quarterly Hogs and Pigs Report
Pork @ Purdue
Purdue Agriculture News: Pork Outlook

Purdue News Service: (765) 494-2096; purduenews@purdue.edu


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