About three years ago the average pork producer saw his last profit. Since then it has been red ink because of low pork prices, low demand, and high production expenses. But there was a glimmer of hope that brightened the pork industry after Friday’s quarterly Hogs and Pigs Report from USDA. Instead of production numbers that exceeded those from a year earlier, there were some significant 3-5% drops, and some of the cutbacks were more than what the market anticipated. We’ll let you decide if it is good, but here’s the news…

Purdue economist Chris Hurt in his latest newsletter says the September 25th report indicated that producers are cutting back more than expected:
• The breeding herd was down 3.1% over the past year compared to an anticipated 2.5%.
• The number of pigs weighing less than 60 pounds was down 3.7% compared to an anticipated 1.5% reduction.
• The market herd was down 0.7% more than pre-report guesses.

While the cuts were small, Hurt believes an increased demand will compensate, helped by a general recovery in the economy which will “free up” consumer spending money. And he expects exports to strengthen as well with the help of the weaker dollar, since USDA is forecasting a 9% increase in pork exports over the next 9 months compared to year ago levels.
Chris Hurt expects prices to shift from the high $30 range into the low $40 range this winter and into the mid $40 range next spring. He thinks prices in the summer of 2010 could touch $50. While market prices are needed, profitability will be helped by lower costs for corn and soybean meal which should be in the $44-47 range during the coming 9 months. That means the current $15 loss per head should slowly reverse to a $12 profit by next summer.

The USDA forecast may come to fruition in the fourth quarter of this year when hog slaughter may decline for the first time since 2000, says Iowa State livestock economist Shane Ellis. His analysis of the Hogs and Pigs Report says, “A declining pork supply may not be the only reason to be optimistic about hog prices. Consumer confidence and spending habits have regained some strength as the brunt of the economic recession has passed. Any improvement in economic conditions both domestically and globally will lead to improved demand and prices.”

In 2008 hog prices were buoyed by global demand and the export trade kept prices as high has it could with one out of five hogs going overseas. While year to date exports are down 19%, the trend began to turn at midyear, and Shane Ellis says, “Exports volumes are back on track with what a traditional year over year increase would have been without last year’s exception.” The only challenge to the trend seen by Shane Ellis is the 2% growth in pigs per litter to 9.51.

At the University of Missouri livestock economists Glenn Grimes and Ron Plain observe that the trends reported by USDA and the pre-report estimates of the market have been engaged in an interesting dance of reconciliation of their respective and joint numbers. In their latest newsletter they say, “In recent reports the USDA has estimated numbers a little below the trade estimates but actual marketings on average have been above the trade estimates. We must remember the USDA estimates are based on a sample and the trade estimates are based on other statistics and opinions. Therefore, both estimates are subject to error. We certainly hope the USDA’s September estimates are the more correct ones.”

Grimes and Plain are not at bullish on the pork market as is Purdue’s Chris Hurt. They say there is “some chance” that both consumer demand and live hog demand going into 2010 will be positive. “This hope is based on a stronger general economy and a weaker U.S. dollar which is positive for exports. There are also some potential storm clouds. What will be the reaction of consumers and importers if we get some swine herds developing H1N1 flu this fall and winter?”

While producers have been losing money, Grimes and Plain say the retailers have been making money for the first eight months of the year, with retail prices 1.8% above 2008 levels. Their forecast for farmgate prices of pork in a declining supply is for 51-52% lean hogs to average in the low to mid-$30’s live weight and non-packer sold hogs to average in the upper $40 based on carcass weight early in 2010. They are pushing their carcass prices into the low $50 range for the first quarter of next year.

Summary:
The USDA’s recent Hogs and Pigs Report provided some hope for pork producers that production will soon decline to a point where the supply will diminish and prices may begin to climb again toward profitability. Several Cornbelt livestock economists are forecasting $50 prices early in 2010. In addition to supply adjustments downward, the economists all expect domestic and foreign demand to increase as the global recession subsides.