December 10, 2008

Recession expected to help drive profits to pork producers

WEST LAFAYETTE, Ind. - Pork producers have the opportunity to lock in margins using the futures market to sell lean hogs and buy grain, and they should take it, said Purdue University agricultural economist Chris Hurt.

According to Hurt, there are two factors that come into play: herd cutbacks and the recession, which drives down feed costs and consumer spending.

"Hog producers lost a lot of money this year, and we're seeing herd cutbacks in the United States and Canada, so we expect somewhat smaller pork supplies - probably 2 percent to 3 percent," Hurt said. "In addition to herd cutbacks, the financial crisis is pushing feed costs down."

Corn has averaged $4.60 a bushel for pork producers in 2008 and is expected to average around $3.40 a bushel for 2009, Hurt said. This downward price shift also applies to soybean meal. Producers have paid about $330 per ton for soybean meal in 2008, and the price is estimated to fall to around $250 per ton in 2009, Hurt said.

In considering the tight economy, the ag economist also expects consumers to favor pork over beef because of its lower price. This year pork has averaged $2.92 a pound at the retail level, and beef has been about $1.40 higher, averaging $4.31 a pound, Hurt said.

"When you add these things together, we actually think the cost of production will drop from about $53 per hundredweight in 2008 to around $47 per hundredweight next year," he said. "When you combine the lower cost of production with the smaller hog supply, pork producers should see some profitability by late winter - February and March."

After that time, Hurt expects smooth sailing for profitability through the remainder of 2009.

Hurt said revenues should correspond with the production costs.

"The revenue for the price of hogs averaged $48 this year," he said. "Those could be up in the low $50 range with costs back more in the mid to higher $40 range."

However, Hurt cautions that there are still many uncertainties ahead for agriculture.

"Knowing which direction feed prices and hog prices are headed with the financial crisis is difficult," he said. "But we know that using the futures market to both buy corn for 2009 and sell lean hog futures provides profitable prices for producers right now.

"This is not something producers have seen for a while, but it's certainly welcome. There is profit opportunity now, and, obviously, when profits are there it makes sense to at least consider it."

Writer: Julie Douglas, (765) 496-1050, douglajk@purdue.edu

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

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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