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Hog Outlook Turns Less Optimistic

Just when it looked like hog production was headed safely back to profitability in 2014, hot and dry weather late in the growing season has threatened the bright outlook. Rapid increases in feed prices have raised expected costs nearly five dollars per live hundredweight from their lows in early August. This has not wiped out the profit potential, but should make hog producers more cautious about expansion. Expansion needs to be constrained to no more than a three percent increase in the breeding herd over the next year. At this writing, December corn futures have advanced to near $5.00 per bushel, fully 50 cents per bushel higher than the lows made in early August. The impact of a 50 cent per bushel rise in corn prices is about $2.20 higher hog production costs on a live weight basis. October soybean meal prices have risen to $440 per ton, up about $90 per ton from their August lows. A price increase of this magnitude raises hog production costs about $2.80 per live hundredweight. In combination, the two price increases have pushed up expected costs by nearly five dollars per live hundredweight. Expected costs over the next 12 months are now estimated to be near $59. While the cost outlook has risen, the hog price outlook has not increased proportionally to feed prices. Expected margins have narrowed, but not collapsed. Starting with a cost of $59 per live hundredweight, current forecasts of hog prices will cover those costs. Prices this fall and winter are expected to be around $61, rise to $65 in the second quarter of 2014, and then drop to about $62 for a third quarter average. That makes the average over the year spanning the fourth quarter of 2013 through the third quarter of 2014 about $62.50 and provides an expected profit of about $3.50 per hundredweight, or nearly $10 per head. 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. 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 …