ShapeShapeauthorShapechevroncrossShapeShapeShapeGrouphamburgerhomeGroupmagnifyShapeShapeShaperssShape

Economic Disaster in the US Pork Industry and Implications for North Carolina

by 5m Editor
14 October 2009, at 12:00am

Kelly Zering, Associate Professor and Extension Specialist in the Department of Agricultural and Resource Economics at North Carolina State University explains why the current economic climate has hit the state's pig industry particularly hard. The article is published in the University's Swine News.

US pig producers have lost an average of more than $21 per hog marketed on every hog sold since October, 2007 (Lawrence, based on USDA data). More than 195.6 million market hogs have been slaughtered in the US during that time (USDA NASS), so pig producers have lost more than $4.1 billion in equity in the last 21 months. The equity loss is more than 50 per cent of the estimated equity in the US pig farming sector at the beginning of October 2007 (Meyer, 2009a).

Current futures prices for market hogs and feed suggest losses may continue for several months. The period of loss is extraordinary in terms of the duration and amount of money lost by the US pig farming sector.

Several factors have contributed to the extraordinary losses. Corn is the single largest expense for pig producers. About 12 bushels of corn are consumed by pigs for each hog marketed. Central Illinois cash price for corn had averaged slightly above $2 per bushel from 1998 through mid-2006. Corn prices rose steadily from mid-2006 through the summer of 2008 and peaked near $6.50 per bushel in central Illinois and near $8 per bushel on the futures markets. Corn prices have since fallen as fears of immediate shortages have waned. Even with the second largest planted acreage for corn in US history, prices for corn through August 2010 are expected to average between $3.35 and $4.15 per bushel (USDA ERS), a 67 per cent to 107 per cent increase above the 1998 through mid-2006 average price. Despite two of the largest corn crops in US history in 2007 and 2008, corn prices were driven higher by several factors, including the federally mandated use of corn to produce fuel ethanol. Fuel ethanol consumed 3.2 billion bushels of corn from September 2007 through August 2008 and is expected to consume 3.65 billion bushels in the 12 months ending August 2009 and 4.1 billion bushels between September 2009 and August 2010. These quantities represent 23 per cent, 30 per cent, and 33.36 per cent of US corn production in 2007, 2008, and predicted for 2009 respectively. As recently as 2002/2003, fuel ethanol consumed less than 1.0 billion bushels of corn per year. Very rapid expansion of ethanol production occurred in conjunction with federal mandates imposed in 2005 and 2007 and with rising fuel prices in 2006 through 2008. The current mandate requires US corn ethanol production to increase by 4.5 billion gallons to a total of 15 billion gallons per year by 2015, requiring about 5.36 billion bushels of corn per year. Increased corn prices cost US pig producers about $2.20 per bushel consumed between October 2007 and June 2009 or about $26.40 per hog marketed during that time.

Soybean meal is also among the largest expense items in pig production. Soybean meal prices rose as land was shifted to corn production in 2007 to meet ethanol demand and have remained high through June 2009 based on reduced global supply of soybeans. Soybean meal at Decatur Illinois averaged $183 per ton from September 1998 through August 2007. From September 2007 through June 2009, soybean meal prices at Decatur averaged $326 per ton. Despite a record US acreage planted to soybeans in 2009, USDA predicts Decatur soybean meal prices between $275 and $335 per ton through August 2010. Pigs consume about 0.081 tons of soybean meal for each hog marketed. The extra $143 per ton of soybean meal has cost US pig producers about $11.58 for each hog marketed since October 2007.

It is important to note that higher corn and soybean meal prices have also imposed serious economic damage on the US broiler chicken and turkey producing sectors. Similarly to pig production, broilers and turkeys are important components of North Carolina agriculture.


*
"Over a 10-week period from 24 April to 22 July 2009, US pig producers received $22.73 per head less than the futures market had indicated prior to media coverage of the H1N1 outbreak"

US Market hog prices have declined since mid-2007 due to several factors and despite declining domestic per capita disappearance of pork. Pig producers had the unfortunate timing of adopting a vaccine in 2007 and 2008 for a disease that had limited pig production for several years. As a result total US commercial pork production rose from 21 billion pounds carcass weight in 2006 to 21.9 billion in 2007, 23.347 billion pounds in 2008, and a predicted 22.7 billion pounds in 2009. Fortunately for pig producers, export demand for US pork has generally been growing steadily from 2 billion pounds of net exports in 2006 to 2.17 billion in 2007, 3.83 billion pounds in 2008, and 3.38 billion pounds forecast in 2009. Had it not been for exports, the disaster would be even worse than it is.

Net US consumption of pork as measured by annual disappearance per capita has declined from 50.8 pounds retail weight in 2007 to 49.5 pounds in 2008 and is predicted to be 49.1 pounds per capita in 2009 and 46.9 pounds per capita in 2010. The predicted 2010 per capita disappearance is the lowest US consumption of pork in USDA online data going back to 1993 and represents a significant decline in the welfare of US consumers.

The only method available to producers to increase prices for pigs in response to higher input costs is to reduce production. Despite falling per capita disappearance in the US, hog prices have fallen since October, 2007. The US national base price for barrows and gilts was $47.26 per hundred pounds live weight in 2006, and $49.64 through the first nine months of 2007. Over the 21 months from October 2007 through June 2009, the national base price averaged about $45.20. The most recent element of the economic disaster was the sharp drop in domestic and export demand for pork following widespread media coverage of the H1N1 virus outbreak under the name 'swine flu', even though pork posed absolutely no risk of spreading the disease. Recent estimates (Meyer 2009b) are that over a 10-week period from 24 April to 22 July 2009, US pig producers received $22.73 per head less than the futures market had indicated prior to media coverage of the H1N1 outbreak. The cumulative loss is estimated at $456 million. The damage to pork demand lingers in the pork futures market, and an additional $1 billion in lost revenue is predicted to 9 April 2010 based on current futures prices (Meyer, 2009b).

The implications of the economic disaster in the US pork industry are becoming apparent in North Carolina. At least three North Carolina pig producers have filed for bankruptcy or are in the process of doing so (Weisbecker, 2009). The extended period of deep losses has drained the equity of all pig producers and pushed some into bankruptcy. As producers try to cut supply to increase pork prices, barns are being left empty. Similar events have been occurring in the broiler sector and in the turkey sector in North Carolina over the past year. Some farmers faced foreclosure on broiler houses when a major producer went bankrupt. The implications extend throughout the rural communities in North Carolina that are supported by these farming and meat processing operations. Reduced production means lost income, lost employment, lost capital investment, lost tax base and lost economic activity throughout the local and state economy. Pig production represented 22.1 per cent of North Carolina cash receipts from agriculture in 2007 (NCDA&CS). Broilers (28.5 per cent) and turkeys (5.9 per cent) along with pigs account for 56.5 per cent of North Carolina cash receipts from agriculture, so losses in these sectors have major impacts in North Carolina.

North Carolina has marketed about 18 million pigs per year or more over the last decade. Losses of $21 per head marketed sum to about $661 million of equity lost in North Carolina over the past 21 months. Each dollar of lost income in hog production is estimated to result in $0.80 lost elsewhere in the North Carolina economy. Pig production losses of $661 million over the past 21 months have resulted in an estimated $529 million in lost income elsewhere in North Carolina. Combined effects of the pork sector disaster are estimated at $1.19 billion in lost income in North Carolina over the past 21 months, with further losses anticipated over the next several months. State and local taxes based on income and sales are directly affected.

Job losses result from reduced pig production. An estimated 8,000 full-time jobs existed in pig production in North Carolina in 2007. A five per cent reduction in pig production would result in the loss of 400 full-time jobs. Each job in pig production is estimated to support 2.43 jobs elsewhere in the North Carolina economy. A loss of 400 jobs in pig production would result in an estimated 970 jobs lost elsewhere in North Carolina. The combined effects of a five per cent reduction in pig production in North Carolina would be 1,370 full-time jobs lost.

Capital losses due to reduced pig production include the loss of capital invested in buildings, land improvements, and equipment. Buildings and equipment dedicated to pig production were estimated to have a depreciated value of $500 million in 2007. Abandoning five per cent of that capacity would result in a loss of $25 million in capital and property tax base.

Reduced pig production implies reduced pork packing and processing. North Carolina experienced reductions in pork processing capacity over the past year. Further reductions are possible if pig production is reduced in the state and regionally. The North Carolina pork processing sector was estimated to employ 11,686 people and generate $450 million per year in (value added) income in 2007. A five per cent reduction in pork packing and processing would cause an estimated loss of 584 full-time jobs and $22.5 million in annual income in North Carolina. Each job and $1 of income in pork processing are estimated to support 0.565 jobs and $0.59 of income, respectively, elsewhere in the North Carolina economy. The estimated effects of a 5 per cent reduction in pork processing include 330 full-time jobs and $13.3 million of income lost elsewhere in the North Carolina economy. The combined effects of a five per cent reduction in pork processing in North Carolina are estimated to include 914 full-time jobs lost and $35.8 million in lost income.

When added to the losses imposed on the broiler and turkey industries by higher feed prices, impacts of the current economic disaster in the US pork industry are particularly severe in North Carolina. North Carolina feeds about 300 million bushels of corn grain to livestock and poultry each year while North Carolina corn production ranges from 58 (2008) to 155 (1981) million bushels per year.

It is particularly unsettling that this economic disaster in the US pork industry comes at a time when the FAO is predicting sharply increased demand for meat, including pork, over the next 20 years as global population increases and an increasing proportion of the population moves into the middle class in terms of income and consumption.

References

  • Lawrence, J. Iowa State University. Farrow to Finish Profits (periodical series of estimates)
  • Meyer, S. 2009a. Paragon Economics. July 2009
  • Meyer, S. 2009b. Paragon Economics. Projected and Actual Hog Prices, Pre and Post H1N1 as of 2 July. 8 July 2009
  • NCDA&CS. 2008. North Carolina Agricultural Statistics, 2008
  • Weisbecker L. 2009. North Carolina’s $2B Hog Industry Belted as Farms Fail. Triangle Business Journal, 29 May 2009
  • USDA ERS. Feed Outlook FDS-09g, 14 July 2009
  • USDA NASS. Livestock Slaughter Mt An 1-2. Various is­sues 2008, 2009.

September 2009