Iowa State University's (ISU) Department of Economics reports that the average farrow-to-finish producer was once again profitable for September market hog sales -- but just barely. ISU estimates that these operations made just $2.29/head on those animals. That marks the eighth straight month of profits after an estimated loss of $0.60/head back in January -- a loss that broke the record-long streak of profitable months.

I fully expect the September profits to be the last we see for a while for two reasons -- lower prices and higher costs. Of course, it doesn't take a Ph.D. economist to figure that one out!

Pork cutout values and hog prices appear to be finally succumbing to the record slaughter runs of the past six weeks, as both have reached their lowest levels since early 2006. It is likely the lows for both of these are close at hand, but these output levels and what may be much larger freezer stocks will keep pressure on prices into 2008. The June-August pig crop (+3.4% from last year according to USDA) still looms over markets for the first quarter of next year.

And the problem is, the USDA's record for the September Hogs & Pigs Report thus far is not too stellar. Hog slaughter has exceeded the levels predicted by that report by 2.4% since Sept. 1 and that difference continues to grow with each 2.3 million-plus slaughter week.

Still, the drops in pork and hog prices have, in fact, been less than we would expect with constant hog demand given these supplies. There is no indication at all that packers have either reached the throughput level that drives up marginal costs severely or exercised any degree of market power. The lower prices are simply the result of larger tonnage.

The most surprising factor in ISU's September cost and return estimates, though, was the rapid increase in breakeven costs for the month (see Figure 1). I expected that to happen to some degree, but this struck me as a quick increase and a harbinger of things to come. Corn and soybean meal futures have been on a tear through October and those increases will almost certainly drive ISU's estimate of breakeven costs above $50/cwt., live weight, when the October numbers are published.

How High Can Feed Costs Go?

This all begs the question: "Where will costs stop?" As of Wednesday, Nov. 7 my index of feed costs (Figure 2) had increased to over $140/ton, $20/ton higher than it was in late July. More shocking is the level of this index based on futures prices through 2008. It has now met or exceeded the levels reached last June before we knew whether or not we would have a crop in 2007. The price increases since late July have added roughly $40/ton to diet costs.

Assuming that it will take somewhere between 650 and 700 lb. of this corn-soy mix to get a pig to market, higher corn and soybean meal prices have added $12-15/head to the cost of producing a pig, should the 2008 futures prices actually come to pass.

There is little in the market right now to suggest that they will not. Soybeans are bidding mightily for acres with futures prices eclipsing $10/bu. Corn will have to fight back, but there have been several reports of analysts who think corn acres will fall to 85 million in 2008. Friday's USDA Crop Production Report will be critical for this market. There has been a great deal of talk of a 250-300 million bushel reduction in the 2007 estimated corn crop. Anything more than that will set off a new round of buying while, I fear, anything less than that will have very little downward impact on corn futures prices.