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Livestock Price Outlook - October 2003

by 5m Editor
14 October 2003, at 12:00am

By Chris Hurt - Caution - More hogs will mean more losses. The hog industry can’t seem to get "back in the black." The spring of 2003 brought great promise as liveweight prices pushed above $45 for a few weeks in June.

Summary

Prospects for sharply lower feed costs were taking place at that time as well. But, the events of the summer would not be so kind. An increasing flow of pork and live hogs from Canada would serve to depress hog prices and the late-summer weather turned negative, resulting in rising prices for soybean meal and corn to a lesser degree, for corn.

U.S. producers have cut the size of the U.S. breeding herd over the past five quarters by 4 percent, but this has only reduced pork production by 1 to 2 percent. The reasons are threefold. First, sow productivity continues to improve modestly so that the industry is producing more pigs per sow. Second, marketing weights continue to rise so that each pig (and therefore each sow) produces more pounds of pork each year. Finally, even though producers in the U.S. have cut the size of their breeding herd, Canadian producers have been expanding and have increased shipments of live pigs to the U.S. by an estimated 1.2 million in the past two years. These factors have made the U.S. breeding herd reductions nearly futile toward the objective of reducing pork supplies and raising prices back into the black.

Now, USDA is reporting that producers will only reduce farrowings by 1 percent this fall, and intend to farrow as many sows this winter as last. If they follow through, pork supplies, which will remain 1 to 2 percent lower this fall and winter and will begin rising by mid-year 2004. In addition, sow slaughter has been dropping since July, which is a potential early indication that producers may be leaning toward breeding herd expansion.

Farrow-to-finish producers can anticipate some moderate losses this fall and winter, before returning to some moderate profits next spring and summer. Prices on a liveweight basis are expected to average in the mid-to-higher $30s this fall; $1 to $2 higher in the winter; and in the low $40s next spring and summer. With estimated costs being in the $39 to $41 range, the outlook for the next 12 months appears to be for near breakeven operating margins.

The Numbers

Hog numbers and pork supplies will be somewhat higher than had previously been anticipated according to the September Hogs and Pigs inventory report from USDA. The numbers are shown in Table 1. While the breeding herd remains 3 percent smaller than last year, farrowings will not be down as much. The summer pig crop was only down by 2 percent, while fall farrowing intentions are down only 1 percent and winter intentions are unchanged. Producers have been reducing their herds as a result of financial losses in the last half of 2002. The breeding herd has been in a reduction phase since September of 2002 and has continued for five consecutive quarters.

Normally, one would expect the herd to stay below year-earlier levels for about 6 to 8 quarters.

The breeding herd was lower in most major production states. In percentage terms Indiana had the largest breeding herd decline at 9 percent, Iowa’s herd was down 7 percent, Missouri was down 6 percent, Ohio down 3 percent, and Illinois’ breeding herd dropped by 2 percent. Major states with unchanged or increasing numbers included North Carolina as unchanged; Minnesota with a 2 percent increase in their breeding herd; and Nebraska’s herd was up 4 percent

The market herd was down 2 percent. Marketing weights will likely be somewhat higher, so total pork production this fall and winter may be down 1 to 2 percent. By summer of 2004, supplies are expected to begin to climb once more. More pork is not what hog producers want to see, as prices may still be below cost of production for portions of this fall and winter.

The following table shows the magnitude of herd adjustments that have occurred in the U.S. industry since 1990. The first column compares the size of the breeding herd today with the size in September of 1990. The U.S. breeding herd today is 86 percent as large as it was in 1990. However, a number of large production states have seen a much larger decline. Iowa, Illinois, Indiana, and Ohio now have breeding herds that are 55 to 61 percent the size they were in 1990. In contrast, Minnesota and North Carolina have increased the sizes of their breeding herds even in the face of a declining U.S. herd.

Current inventory as a % of September 1990
Breeding (%) Total (%)
Ia 61 107
Il 60 68
In 55 67
Mn 102 131
Mo 83 105
Ne 77 71
NC 313 367
Oh 60 70
US 86 107

The second column is the size of the current "total inventory" compared to 1990. Total inventory includes both breeding herd and market herd animals. Most states have a total inventory percentage which is greater than the breeding herd percentage. This is resulting from two factors. The first is that each animal in the breeding herd is producing more pigs. Secondly, some states are getting a much larger inflow of finishing pigs than other states.

One of the dramatic changes in modern multiplesite production is that pigs are now moved around the country to find the best economic location at each stage of production. In an USDA: ERS study titled “Interstate Livestock Movements” (LDP-M-108-01) it is reported that in 1990, 3.6 million pigs were moved in interstate shipment for finishing or breeding.

That number increased dramatically to 26.9 million by 2001. The vast majority of these pigs are moved as SEW pigs for finishing with the top five inshipment states being: Iowa (13.0 million head); Minnesota (4.1 million head); Illinois (1.6 million head); Missouri (1.6 million head); and Indiana (1.3 million head).

The significance of inshipments to Iowa is astounding. In 2001, the state marketed a total of 26.3 million head, and inshipments accounted for 13 million of that total. That is, in-state Iowa producers farrowed about one-half of their hogs and shipped-in for finishing the other one-half. By 2002, the portion of inshipments to marketings had increased to 53 percent.

Canadian Impacts

This summers, hog prices were lowered due to the increased flow of hogs and pork from Canada. While the border was closed to beef, it was open to hogs and pork. In Canada low retail beef prices stimulated consumers to eat more beef at the expense of pork and other competitive meats. Much of this displaced pork was shipped to the U.S.

Figure 1: Imports of Canadian Live Hogs

Pork imports from Canada increased in June and July by 14 percent over the same period in 2002. For the period January through July, imports from Canada were up by 16 percent. The added pork imports from Canada compared to last year were an additional .6 percent of U.S. production.

The flow of live hogs continues to increase as well. In the period January through July, total live imports were up by 16 percent, primarily due to a huge increase in young pigs coming to the U.S. for finishing. Slaughter hog numbers from Canada this summer represented about 3 percent of U.S. slaughter compared to about 1.5 percent earlier in the year.

The sum of added pork imports and added hog imports represented somewhat over 2 percent of additional pork in the U.S. market, depressing U.S. prices by perhaps $2 to $3 per live hundredweight.

Of course, the largest Canadian influence is the growing number of young pigs coming for finishing. In the January through July period these totaled 2.8 million, an increase of 29 percent over last year.

All live imports may reach 6.5 million head this year, as shown in Figure 1. This is approximately double the number of live animals imported in 1997, and will represent about 6.6 percent of total U.S. slaughter.

One factor that should begin to reduce the incentive to ship Canadian hogs to the U.S. is the exchange rate. The Canadian dollar has strengthened by about 15 percent this year in relation to the U.S. dollar. This means that hogs sold at the same price in the U.S. will bring 15 percent less when the U.S. dollar is converted back to Canadian dollars. However, most of the pigs coming to the U.S. are on long-term contracts. This exchange rate difference will first reduce the incentive to sign new contracts, but will not stem the flow immediately.

Small Supply Reductions Lagging Prices

Pork production in the U.S. is expected to be down about 2 percent during this fall and winter. Supplies are expected to be down about 1 percent in the spring, before turning slightly higher next summer. Estimates for supplies and prices are shown below and in Tables 3, 4, and 5. Marketing weights so far in 2003 have averaged about .5 percent higher than for 2002. This fall, corn prices will be sharply lower than in the fall of 2002, and therefore marketing weights are expected to be nearly 1 percent higher than last fall. Weights in the winter and through next summer are anticipated to be about .5 percent higher. If producers follow through on their intentions to keep farrowings unchanged this winter, pork production by next summer will begin to creep above previous year levels.

Prices are not expected to be what producers had been hoping for. This fall, liveweight prices are expected to average in the mid-to-higher $30s and near $40 for the first quarter of 2004. Additional improvement is expected seasonally into the spring with prices averaging in the lowto- mid $40s. The current forecast for the summer is for prices to average in the very low $40s. These prices may be higher if the summer’s Canadian hog shipments are moderate.

Costs of production are expected to be in the $39 to $41 per live hundredweight range over the coming 12 months. Given the prices forecast here, this means farrow-to-finish producers with near average costs may operate with $1 to $2 per hundredweight losses this fall and winter and switch to $1 to $2 of profits next spring and summer.

Summary and Implications

Some additional financial losses can be expected this fall and winter as hog prices dip below costs of production at times. However, these losses are expected to be relatively modest on average, with margins turning toward the slightly positive side by next spring and summer. The industry has generally operated at a loss for most of 2002 and 2003. The largest estimated losses in this time period were nearly $8 per hundred in the last quarter of 2002.

At this point, the outlook for the coming 12 months shows little help in restoring weakened financial positions that have resulted from the last 2 years of average losses. It is discouraging to see producers indicate they will bring farrowings back to unchanged levels by this winter as the liquidation phase of the hog cycle seems to have been very short and shallow in the past year.

On the positive side, the USDA is allowing some Canadian beef to be imported to the U.S. and growing volumes of beef imports will likely be allowed into the fall and winter. This will enable cattle and beef prices in Canada to rise which will serve to expand Canadian pork consumption and reduce some of the flood of hogs and pork products coming to the U.S. This may enhance U.S. prices in the range of $1 to $3 over the coming year.

Feed is another concern, particularly the costs of soybean meal. Meal prices tend to bottom in the first-half of October, but may be somewhat later this year due to the late harvest. Booking some portion of meal needs is often a favorable strategy near anticipated harvest lows. The late fall and winter price direction for meal may be highly influenced by South American soybean production prospects. Above normal yields would result in falling meal prices, with below normal production providing the potential for much higher prices.

For corn, yield reports are encouraging and USDA is expected to increase estimated production. Harvest prices tend to reach lows in very late October or early November. Ownership of corn at harvest appears to be a favorable strategy. Futures and basis levels will likely weaken somewhat more into late-October, costs of storage is low given moderate interest rates, and prospects for corn price recovery are high with tight world stocks and a devaluing U.S. dollar.

Further Information

To read the full report, including tables, please click here.

Source: The University Of Perdue & The University Of Illinois - October 2003