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Higher corn prices mean higher hog prices

by 5m Editor
5 February 2007, at 9:57am

IOWA - There's an old adage, “high corn prices make for high hog prices.“ According to John Lawrence, Iowa State University livestock marketing economist, the adage is true.

John Lawrence
John Lawrence

The challenge is the timing. Economists often figure the hog/corn ratio, which is the hundredweight live hog price divided by the price of a bushel of cash corn. In fact, Lawrence said economists have been looking at this ratio since about 1920.

They recognized way back that the number ??“ was pretty important to this ratio. For instance if hogs are $50/cwt. and corn is $2 - the ratio is 25 - there is enough profit that people expand hog operations. If hogs are $40/cwt. and corn is $2.50 - the ratio is 16 - there are enough losses that hog producers cut back. “That was old school,“ said Lawrence, “except I can't find much evidence to suggest that number is wrong.“

Given cash corn at $3.66 and live pigs at $43/cwt. (Jan. 18, 2007 Western Minnesota), the hog/corn ratio is 11.74. That ratio indicates that hog producers will cut back on production - most likely scaling back on weights initially. Despite that cut back in production - looking back at historical trends, Lawrence projects that hog prices will remain low six months from now.

A year later, hog prices should begin to even out to match up with higher corn prices. Eighteen months from now - if we continue to experience high corn prices, hog prices should move higher. “Do hog prices adjust to corn? Yes - in a year and a half,“ said Lawrence. “But what gives us higher hog prices? Lower supply.“ Hog prices have been profitable for nearly three years, but it hasn't been due to a lower supply. Basically, hog prices have been higher as consumers have been eating more protein following the Atkin's Diet. In addition, exports for U.S. pork have steadily increased. Another reason for higher hog prices is hog producers have limited pork expansion.

In 2006, domestic consumer demand became weaker - by 1-2 pounds/year from the very strong demand found at the height of the Aitkin's Diet in 2004, Lawrence said. The impact on the hog prices was masked by higher exports. Exports remain very strong - about 15 percent of the U.S. total pork product is exported. However, about 40 percent of exports go to one market - Japan. Having one very strong market raises a red flag because of increased marketing risk should something go wrong.

USDA's current forecast calls for a 2 percent increase in pork supplies in 2007. But looking at the factor of higher corn prices only then pork prices eventually move higher as farmers lose money in their operations and decide to cut back on production.

“Pain and suffering,“ said Lawrence. “We generally don't step up and say, ‘You know, for the good of the rest of you, I think I'll quit.' Usually there has to be an incentive, which is the bank account is empty.“ Lawrence, who spoke to pork producers at Minnesota Pork Congress, said that because of today's high corn prices, producers are already beginning to reduce market weights, but lower weights will not be enough to create profitable hog prices.

“Lower weights are supportive of prices, but it won't push them high enough to fully offset the higher corn price,“ he said. Hog farmers have been feeding about 12 bushels/head of $2 corn to finish pigs. To offset the current price of $3.50/bushel corn, the carcass price of hogs would need to move up about $18/pig or $7-$10/cwt. higher, he said.

“Bottom line is we're looking at lower prices as we move forward,“ said Lawrence. To increase the average carcass price of hogs by $9/cwt., a 5 percent reduction would be needed in pork supplies to the packer, he said. Bottom line is with corn at $3.50 it's not likely that finishing hogs will sell high enough to maintain profitability in pigs.

Given the current pig/corn ratio and other marketing factors, Lawrence estimates that live hogs will trade at $42-45 for the first quarter of 2007, upper $40/cwt. from April through September, and in the mid-$40s for the fourth quarter of 2007.

“We'll probably see red ink in the first quarter, and perhaps in the fourth quarter,“ said Lawrence. “The summer hog prices should be high enough to cover the higher cost of production due to increased feed costs.“

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5m Editor