Large Losses Still Loom for Pork Industry

Contributed by Debra Levey Larson at the University of Illinois

URBANA – 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. These large losses have been brought on by the extreme feed prices due to the drought.

According to Purdue University Extension economist Chris Hurt there is little producers can do to change the overall situation for the industry because 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,” Hurt said.

“In the spring of 2012, producers were optimistic that cheap corn was going to arrive by the fall and were expanding the breeding herd,” Hurt said. “That optimism faded quickly after mid-June when the reality of drought became apparent. The drought turned optimism into fear and producers then shifted to a liquidation mode during late July and August. By early September they had reduced the size of the breeding herd by 74,000 (1.3 percent) compared to the USDA June inventory estimate. In September, weekly sow slaughter estimates indicated a slowing of the liquidation, with sow slaughter only slightly larger than a year ago. Some follow-through on sow liquidation appears to be likely as farrowing intentions are down nearly 3 percent for the fall and 2 percent for this coming winter,” he said.

Hurt said that September hog slaughter was up about 4 percent and was surprisingly large. USDA’s Sept. 1 market herd inventory estimates suggest that this high rate should drop to only 1 percent more hogs in October and then move to 1 percent fewer hogs for November through February. Next spring’s market hog supply will also be down about 2 percent, with fall farrowings down 3 percent and the number of pigs per litter up 1 percent. Supplies next summer would be down about 1 percent if producers follow-through on intentions to reduce winter farrowing by 2 percent and with 1 percent more pigs per litter. Market weights began to drop in September as producers tried to save valuable corn. Currently producers are selling hogs about 3 pounds lighter. Lighter weights are likely to continue and will help ease pork supplies as long as corn and meal prices stay high.

“Large losses still loom over the industry for the next six months,” Hurt said. “Live hog prices are expected to be in the mid-to-higher $50s for the final quarter of the year and then improve to the low-to-mid $60s in the first quarter of 2013. Unfortunately, costs are still far higher due to continued high corn and soybean meal prices. Estimated costs this fall and winter are about $73 per live hundredweight and losses are expected to be about $45 per head this fall and $30 in the winter. Unfortunately, the industry has been suffering losses of an average of $18 per head for the past six months representing the second and third quarters of this year,” he said.

How big are these losses across the industry?

Hurt reported that during the last six months, total losses are estimated to have been about $1 billion. Losses in the next six months are forecast at around an additional $2 billion, meaning that the amount of equity erosion that has occurred in the last six months is expected to double in the next six months. For any hog production, operations that are in a weak financial situation at this point, lenders and other creditors will be key to their ability to continue. In September, two large Canadian hog firms filed for receivership and bankruptcy.

Creditors also need to look at the longer-term outlook when making their decisions to continue to finance individual pork operations, Hurt advised.

“By spring, hog production is expected to return to breakeven with the start of some moderation in feed costs due to lower soybean meal prices,” Hurt said. “Corn prices are expected to begin to move lower in the late summer of 2013 if more normal yield outcomes are developing for the 2013 corn crop. Currently the outlook for 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,” he said.

What can producers do now?

“They need to work with their creditors to secure a path through the next six months,” Hurt said. “Overall, some additional reduction in the breeding herd is needed and is likely. Producers can also sell at the lightest weights possible to avoid any underweight discounts. However, the decision on weights depends on the economics of each producer, so each needs to do their own analysis. Also, producers are looking for all alternative feed nutrient supplies including discounted aflatoxin corn that has contamination levels approved by FDA,” he said.