Hog Losses Loom

02:19AM Jan 09, 2013
Hog Losses Loom

Positive returns on hogs not expected until after first quarter

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 suffering large losses for the next few 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 hogs 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 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. "Producers are selling hogs about 3 lb. lighter. This will help ease pork supplies as long as corn and meal prices stay high," Hurt reports.

Exports Dip. "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 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.

"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," Vaught says.

Yields Critical. Large losses will loom for the next six months. Live hog prices are expected to 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. Any hog production operation in a weak financial situation at this point will need support from its 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 break-even with the start of some feed cost moderation. The last three quarters of 2013 might yield a small return of $2 per head. While that would not allow much equity building, it would end the equity erosion, Hurt says.