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July 18, 2003

Economist: Market outlook finally high on the hog

WEST LAFAYETTE, Ind. – Pork producers are slimming their herds and fattening the odds on higher market prices in the months ahead.

Breeding herd sizes in leading hog producing states, including Indiana, are smaller than one year ago. That portends rising prices this year and in 2004, said Chris Hurt, a Purdue University agricultural economist.

Prices could approach the mid-$40 range per live hundredweight by next spring, Hurt said. If so, producers would enjoy their most profitable period in three years.

"We're looking for a profitable year through the rest of 2003 and throughout most of 2004," Hurt said. "The reduction of the breeding herd that's occurring has the supply of pork coming down, giving us prospects for better prices."

The nation's breeding herd stood at 5.94 million head on June 1, down 4 percent from June 2002, according to a U.S. Department of Agriculture report. Midwest pork producers made even greater herd cuts, Hurt said.

"Missouri was at the top of the list, down 11 percent from one year earlier," he said. "Iowa, a huge hog state, was down 8 percent. Ohio also was off 8 percent. Illinois was down 7 percent on its breeding herd, Indiana down 6 percent and Nebraska down 5 percent."

Indiana's breeding herd totaled 310,000 in June, according to the Indiana Agricultural Statistics Service. Total sows farrowed were 140,000 in the March to May 2003 quarter, down 10 percent from the same quarter in 2002.

The massive herd liquidation comes on the heels of industry losses from March 2002 through April 2003. During that 14-month stretch, average estimated loss per head was $12, driving some small- and moderate-size hog producers out of business.

Not far back in producers' memories is 1998-99, when live weight bids plunged below $10 a hundredweight. At its worst point, producers lost in excess of $60 per hog.

Currently, hog prices hover in the low $40s. Production costs per hundredweight are near $40.

The next 18 months should provide producers much-needed economic stability, Hurt said.

"The cost structure is going to come down about $2 a hundredweight this fall," Hurt said. "We think we'll see lower grain prices, lower soybean meal prices and very moderate interest rates.

"We're anticipating hog prices to average in the low $40s per hundredweight this summer. Fall and early winter prices probably will be in the very high $30s. We think that's going to be very close to at least break-even levels, covering all costs. Pushing into the spring and summer of 2004, we're looking for hog prices to be back in the low $40s and probably move toward the mid $40s."

A rebounding U.S. and world economy and weaker U.S. dollar also benefit pork producers, Hurt said.

"Another positive for hog prices is that we're seeing more signs of economic recovery," he said. "That is going to help fuel the demand for pork. We also have seen the exchange rate of the U.S. dollar relative to the Canadian dollar come down. That's a positive factor, in that there will be less incentive for Canadian producers to push hogs to the United States to be fed and processed."

The export of Canadian pigs to the U.S. is up 5 percent this year, with 6 percent of all hogs slaughtered in the United States coming from Canada.

Hurt believes long-term prospects for hog producers could continue looking up, as the industry becomes leaner and more competitive.

"I think there's been a lot of hesitancy about being in the hog business," he said. "There are many concerns about the very narrow profit margins, environmental issues and the negative press the industry has received. Over the next few years, there may be hesitancy among pork producers to expand their operations and for corporations to get into the business.

"My guess is that in the next five years the margins in the hog business are going to be better than the dismal margins producers have endured the last five years."

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

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

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

Related Web sites:
Purdue University Department of Agricultural Economics
Pork @ Purdue


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