Prepared at University of Illinois

Pork supplies in 1998 are expected to increase by about nine percent, leading to record total pork production of about 18.6 billion pounds, far exceeding the previous record of 17.8 billion in 1995. Per capita supplies, however, will not be as large as those in 1995 when production equaled 52.5 pounds per person. For next year, production will reach about 51.9 pounds per person. Pork supplies will increase by about four percent this fall, but will be nearly 10 percent higher than year previous levels by next summer. Terminal live hog prices are expected to average around $44.00 in 1998, compared to $53.00 for each of 1996 and 1997.

Nationally, the breeding herd on September 1 was up 2.7 percent, with expansion in some key western Corn Belt states and in states on the southwest fringe of the Corn Belt. However, eastern Corn Belt breeding herd inventories continued to decline. The national market herd was up 3.6 percent. The largest rise in the number of market hogs resulted from large increases in the pig crop this past summer.

Demand was weak in the late summer due to high margins, which were keeping retail pork prices high and a weaker than expected export program. It is expected that exports will improve in the fall and that retail prices will begin to move downward, both of which will help demand this fall and winter.

Financially, pork producers should expect a movement to lower prices over the next 18 months. Small profits are expected in the first-half of 1998, but last-half 1998 returns could be negative. The lowest hog prices are expected to be in late 1998 and the first-half of 1999. Producers need to begin planning for the financial implications of this time period.

The USDA's September Hogs and Pigs report indicates that pork producers have expanded the size of the breeding herd by 2.7 percent, and the market herd by 3.6 percent. Across the country, pork producers have added a total of 250,000 animals to the breeding herd compared to inventories one year ago. The most robust growth has been in the western Corn Belt states of Iowa, Minnesota, and South Dakota where producers have added 190,000 animals to the breeding herd. Also, growth continued in North Carolina, Arkansas, and Oklahoma where 125,000 breeding animals have been added. The outmigration of sows continued in the eastern Corn Belt, where Illinois, Ohio, and Kentucky had a reduction of 60,000 breeding animals. Missouri also continues to struggle with sharp reductions in sow numbers. Some in Missouri argue there is a backlash against large hog operations as the environmental impacts are examined.

It seems safe to say that the western Corn Belt is coming back. This is particularly true in the northwest portion of Iowa, southwest Minnesota, and eastern South Dakota. Part of the growth in that region can be attributed to a rebirth of the pork industry, but is also associated with the favorable corn crop last year and again this year. The eastern Corn Belt, on the other hand, had smaller crops last year and again this year, likely making it somewhat less desirable for expansion. In addition, population pressures are likely to be a greater restriction to larger scale units in the eastern Corn Belt.

While the breeding herd was up only 2.7 percent, the number of sows farrowed this past summer was up five percent, with pigs per litter up 1.5 percent, and the summer pig crop up 6.5 percent. Farrowing intentions are up 6.5 percent for fall, and 7.6 percent for winter. There had been some question of how the farrowing percentage could be much higher than the percentage increase in the breeding herd this past summer, but the September USDA inventory count seems to confirm this occurrence.

Pork supplies are expected to grow about four percent in the last quarter of 1997 and by nine percent for 1998. In the spring and summer, supplies are expected to be about 10 percent above year-previous levels. Contributing to higher pork production this fall and winter will be heavier marketing weights. Carcass weights are expected to be about one percent larger over the next 12 months compared to the last 12 months. This increase is related to slightly lower anticipated feed costs, particularly from soybean meal, and to the trend increases. In recent years, weights have been increasing about 0.6 percent per year.

For the fourth quarter of 1998, I have projected an eight percent increase in pork supplies. There is no data from the Hogs and Pigs report which would provide a quantitative measure of slaughter levels that far out, so this is an estimate based upon the historical pattern of expansion on a hog cycle. Given these estimates, supplies would reach record high levels in 1998 at 18.6 billion pounds.

The projected increase in production from 17.1 billion pounds in 1997 to 18.6 billion in 1998 is one of the largest in recent memory. From 1987 to 1988, production increased by 1.3 billion pounds or 9.2 percent. For next year, the projected increase is 1.5 billion pounds or 9.0 percent. While this may be positive for feed use and corn prices, it will have a substantial price depressing impact on hog prices.

The large increase in production will result in per capita supplies being about 51.9 pounds per person for 1998. This is sharply higher than 1997, but still less than the levels of the 1992 to 1995 period. Looking back on that period, it was one of rapid expansion of new buildings as the industry was shifting to a more industrialized model. Not only did expansion go unabated for about four years, but there were no major disruptions of feed prices. The expansion plunged hog prices into the mid-$20's for a short period in late 1994. This was followed by the short corn crop, and high prices in 1995-1996, and by high meal prices in the 1996-1997 crop marketing year. Thus 1998 represents the first year when the industry has been able to return to growth.

Prices this fall are expected to average near $50s. Terminal prices were in the high $40s in early October, and they normally move lower into November. If so, the market will struggle to reach the $50 level for a fall average. However, two demand factors may help prices this fall. The Japanese may be more aggressive buying U.S. pork this fall and both marketing margins and retail prices should begin to drop, helping to stimulate utilization.

Prices in the early part of 1998 are expected to be in the mid-$40s, before dropping somewhat into the spring and summer of 1998. If expansion continues as expected, by the fall of 1998 terminal hog prices could be in the very low $40s.

Figure four shows the projected 1998 average price of $43.30 per hundredweight relative to previous years. As noted, this price level is at the lower end of annual average prices over the past 20+ years. Viewed in this manner, the $43.00 to $44.00 range does not look unrealistic compared to the high production years of 1993-1995. In those years, per capita supplies were somewhat larger and prices were somewhat lower.

Expansion is well underway and more can be expected. Returns have been favorable since the spring of 1997, and producers have been able to find sites, despite environmental concerns. The question now is how much additional expansion can be expected, the magnitude of that expansion, and how low hog prices will go. An additional question is how long will the downturn last before we move back to more profitable prices.

The answers to these questions are of course speculation at this point. However, the breeding herd tends to stay in expansion until six to nine months after losses set in. Assuming that the industry will move toward losses starting in the summer of 1998, this would mean that farrowings would continue to expand through the first quarter of 1999. If so pork production could continue to rise into the third quarter of 1999. Thus the lows on the next cycle could come anywhere from the fourth quarter of 1998 to the third quarter of 1999. At this point I would tend to favor them being during the first-half of 1999. If the 1998 growing season should be unfavorable in the U.S., a more rapid liquidation phase would be expected in the fall and winter of 1998, with the lowest hog prices coming at that time.

Pork producers still have a short period of reasonable profits to enjoy this fall. They should begin to think about the cash flow implications of much reduced returns in 1998 and the first-half of 1999. Those who are high costs or who have recently built new buildings will especially want to examine alternatives. Hedging of hog prices and corn prices for late 1998 is a strategy to consider, especially if a breakeven or modest profit is the likely result.

Those who are looking for the next opportunity to expand have some time to get their plans together. They may want to consider starting to breed sows in late 1998 in order to be in full production by late 1999. The year 2000 would be expected to move from a breakeven situation at the start of the year to reasonable profits by the end of the year, but 2001 may be the best of the years in the early part of the next decade. If unfavorable growing season weather does develop next summer, this schedule should be advanced by six months.

Packer margins should be strong over the next two years. Several plants have been shut down in the western Corn Belt, and those will likely reopen in 1998. Regionally, packers in the eastern Corn Belt will continue to have the most difficulty buying hogs due to the reduced production in this region. New packing capacity in the west or southwest can also be expected by the year 2000.

October 1997 Chris Hurt, Extension Economist

Purdue University

Consensus National Futures and Financial On Line Index

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