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Hogs Headed Back to Profitability?

Economist says lower feed prices may be the driver of higher hog margins

Published on: Oct 21, 2013

A reduction in slaughter numbers seems to show what hog producers are noticing: feed prices are falling and hog production is springing back, according to Purdue Extension economist Chris Hurt.

Drought kept feed prices high in 2012, causing producers to flood the market with hogs. However, yields are looking better in 2013, which means profits for hog farmers could be on the up-and-up.

"This year, the hog outlook is almost the opposite of what it was last year," Hurt said. "Feed prices, especially corn, have been falling sharply. The hog outlook is profitable, so producers are more likely to be retaining or building the breeding herd and weights are expected to increase as producers hold onto market hogs longer to gain profits on every pound."

Economist says lower feed prices may be the driver of higher hog margins
Economist says lower feed prices may be the driver of higher hog margins

While the USDA September Hogs and Pigs Report showed hog inventories as unchanged to somewhat larger compared to a year ago, Hurt said slaughter in recent weeks has been very low.

One explanation for the perceived difference in USDA's inventory numbers and slaughter rates could be related to animal deaths from the porcine epidemic diarrhea virus, even though concrete numbers on the death toll are not available.

Another explanation for seemingly low slaughter rates could be attributed to the way the industry and markets evaluate herd numbers with year-to-year comparisons, Hurt suggested. Hogs went to market at higher-than-normal rates in 2012 because high feed prices meant the cost of production was higher than producers could sustain.

"What is being viewed as a very low slaughter in recent weeks might be due to an aberration in the slaughter numbers a year ago," Hurt said. "The unusually high slaughter in the late-summer of 2012 was being driven by the drought. Record-high feed prices and large anticipated losses provided a grave outlook for the industry, and some producers began to adjust."

Those adjustments included an increase in sow slaughter and, in some cases, total-herd liquidation a year ago. Now that the outlook has improved, breeding herd expansion has likely started and hogs are being held to higher weights. These factors mean that fewer animals are headed to market right now and prices have strengthened.

"Given low slaughter numbers, cash prices of hogs have been sharply higher than in the same period in 2012 when they averaged $55 per live hundredweight," Hurt said. "With lower slaughter this year, they have averaged about $68 since mid-August."

Higher cash hog prices combined with lower feed costs are the important drivers for a profitable outlook over the next 12 months..

"These profits will enable producers to recover losses of about the same amount in the past year due to the drought," Hurt said.

Source: Purdue