Hot and dry weather late in the US growing season has threatened the bright outlook for the country’s pig producers, according to economist Chris Hurst of Purdue University, Illinois. He says rapid increases in feed prices have raised expected costs nearly 6p/kg ($5/cwt) liveweight from the low levels seen earlier this month.
Coming just when it looked like pig production was headed safely back to profitability in 2014, the increases have not wiped out the profit potential completely, but he says they should make pig producers more cautious about expansion, which should be constrained to no more than a 3% increase in the breeding herd during the next year.
World corn and soybean markets were expected to make some progress this year toward increasing carryover inventories. If inventories could be increased, that would then bring lower feed prices and less volatility.
The current hot/dry spell in the US, however, brings that hope into question and is a reminder that feed prices will remain volatile until actual progress is made toward world production exceeding world usage. And while the odds that the US harvest will contribute to that goal have been lowered in recent days, Southern Hemisphere production could redress the balance this winter, especially for soybean meal.
December corn futures have advanced fully £12p/tonne (50 cents per bushel) since their low point earlier in Augsut, which increases the costs of production by about £1.44/pig. October soybean meal prices, meanwhile, have risen to £284/tonne, up about £58. A price increase of this magnitude raises pig production costs by about 3.6p/kg.
The unexpected recent surge in feed prices may cause some preliminary expansion plans to be aborted, and therefore increases the likelihood that lean hog futures prices will also rise some from current levels that are based on expectations of a larger expansion.
Mr Hurst says the magnitude of the increase is difficult to evaluate until a clearer picture develops around the actual yields and prices from the 2013 corn and soybean crops. That picture will get a bit clearer with the abatement of the current hot/dry spell and also with the USDA production updates on September 12. However, feed prices probably will not be known with much certainty until more harvest activity is underway in October and USDA issues their monthly production updates on October 11. The impact on lean hog futures would be to increase contract prices for August 2014 and later maturity.
Given the current outlook for hog and feed prices, a relatively small breeding herd expansion could increase pork supplies to a level that would push the industry back into losses starting in the autumn of 2014. A 2-3% breeding herd expansion would be expected to push the industry back to breakeven. While that seems like a small number, Mr Hurst says there are multiple factors that support this expectation: First, a 2% expansion in the breeding herd means that production will grow by a much larger amount. The number of pigs per litter has been growing by an annual average of 1.8% over the last five years. Weights will also increase, so a 2% increase in the breeding herd means about a 4% expansion in pork production.