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Ron Plain

Through September, federally inspected hog slaughter totaled 72.268 million head, down 0.4% compared to the first nine months of 2002.

Prior to 1995, a 0.4% decline in hog slaughter would have been expected to produce a 0.8% increase in live hog prices. That is, the expected price increase was twice as much as the slaughter decline. Since 1994, the elasticity of demand for slaughter hogs has decreased dramatically. Thus, a 0.4% decline in slaughter is now expected to yield a 2.0% increase in hog prices, i.e. the expected hog price increase is five times as much as the slaughter decline.

Even using this new relationship, hog prices were up much more than expected during the first nine months of 2003. Through September, barrows and gilts at the terminal markets averaged $37.28/cwt of live weight, up 10.6% compared to the first nine months of 2002. The national average negotiated base price for barrows and gilts on USDA's prior day purchased reports averaged $52.96/cwt of carcass weight during the first nine months of 2003, up 13.6% compared to January-September of 2002.

The combination of a significant drop in domestic demand for pork and a significant increase in packer demand for hogs is unusual. The increase in live hog prices is due almost exclusively to tighter marketing margins, i.e. middlemen making less money on pork than last year.

Through August (September data is not yet available) the farm-retail price spread was $1.92 per retail pound of pork. This was down 9.9 cents (4.9%) from the first eight months of 2002. Adjusted for inflation, it was down 7.1%.

What does this imply for hog prices during the rest of 2003? With beef prices at record levels and expected to stay well above anything seen prior to 2003 for the remainder of this year, the odds are good that either domestic pork demand will improve or marketing margins will remain tight. Either way, hog prices during the fourth quarter are likely to be well above the $40.36/cwt of carcass weight they averaged during the fourth quarter of 2002.