2013 Outlook: Hog Losses Still Loom

November 11, 2012 11:00 PM
2013 Outlook: Hog Losses Still Loom

Editor's Note: For six weeks, AgWeb.com is taking a look at experts’ projections for a variety of commodities in 2013.

It’s no surprise the 2012 drought left pork producers with short, and expensive, feed supplies. Pulled down by lower domestic and export demand, the pork sector will not see much relief until mid-2013.

"Pork producers are expected to continue to suffer very large losses in the next six months after already operating in the red for the last six months," says Chris Hurt, Purdue University ag economist. "There is little producers can do to change the overall situation for the industry since the pigs that will represent these large losses are already on-feed. The pigs that are here today represent producers’ plans earlier this year when they were hopeful for $5 corn prices."

Iowa State University calculates that market hog slaughtered in September 2012 were sold at a loss of $54.02—the biggest loss since December 1998 and the fourth worst month ever. Given that nearly 28 million hogs were slaughtered in September, the total industry financial loss was $1.5 billion. Estimated breakeven live price during September was a record $72.23/cwt. Current futures market prices imply an average per-head loss in the $30s during the fourth quarter this year.

Market weights dropped in September as producers tried to save valuable corn. "Producers are selling hogs about an average 3 lb. lighter. This will help ease pork supplies as long as corn and meal prices stay high," Hurt reports.

Exports dip, domestic demand remains flat

"A lot of the fluctuations in this market are reverberations from the Chinese buying of last year—the market is still trying to find equilibrium," explains Dan Vaught, owner of Vaught Futures Insights, PLLC. "Huge exports added up to huge increases in demand for pork in 2011. The greatly reduced 2012 Chinese buying of U.S. pork hits hard."

Even as other pork and beef cuts have set record prices at points in the year, pork loin sales have remained flat.

Pork belly demand saw a huge surge this summer—a fundamental positive for domestic pork demand. Even with a drop early in the year below the five-year average, the upswing from May to July tracked near the highs of last year.

Pork Beef Outlook Dan Vaught 35
"The seasonal peak came in August, but it wasn’t long before bacon rallied back to near-2011 levels. This is a sign of underlying increase overall in pork demand moving forward," Vaught says.

It’s unlikely that the holiday ham market will match last year’s demand, however. "The monthly ham stock number for Aug. 31’s cold storage report was 195 million pounds—that smashed the all time high of 180 million pounds. That figure had reached 214 million pounds at the end of September. The market will have a lot of trouble clearing that supply and going much higher from this point. Given the amount of support that the ham market lends to hog prices in the last months of the year, that doesn’t particularly bode well for the hog market for fourth quarter 2012," Vaught says.

Losses continue thorough first half of 2013; Normal yields critical

Large losses will loom for the next six months. Live hog prices are expected to be in the mid-to-higher $50s for the final quarter of 2012 and then improve to the low-to-mid $60s in the first quarter of 2013, Vaught says.

Unfortunately, costs still far outweigh higher commodity prices because of continued extreme corn and soybean meal prices. Estimated costs this fall and winter are about $73 per live hundredweight and losses are expected to be about $30 this winter. Any hog production operations in a weak financial situation at this point will need support from their lenders and other creditors to continue.

Long-term, if normal crop yields are realized and no weather events arise, spring hog production will return to breakeven with the start of some moderation in feed costs. The last three quarters of 2013 is indicating a small positive return of $2 per head. While that would not allow much equity building, it would end the equity erosion, Hurt says.


For More Information
Read an additional outlook: 2013 Outlook: Wheat Prices to Tag Along with Corn


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