First, a lot of people were possibly anticipating the spring rally and the market reflected this attitude and adjusted earlier than normal.
"Perhaps there was too much anticipation of high spring and summer hog prices earlier in the year," Hurt says. "June lean hog futures, for example, reached levels equivalent to about $76 per live hundredweight in late February."
Market fundamentals certainly has something to do with the spring rally's absence, too. In the last 2 months, hog slaughter and pork production were both up about 5%. So, there's not a lot of potential demand growth in the near term, Hurt says.
"Since the first of April, slaughter numbers have been up near 4% and pork production up near 5%. Clearly there were more hogs and higher weights than expected. While this is a bearish factor it is not large enough by itself to have caused the total failure of a spring rally," he says. "The lack of price increases does not seem to be related to weakened export demand either. Both pork and beef export data available do not show declines in foreign purchases. In fact, pork exports in the first quarter were up 16%."
At the same time, feed prices haven't helped profit potential. Hurt expects the total cost of production for a farrow-to-finish operator to near $66/head with today's corn and soybean meal prices. "This would leave losses of about $5/head," he says. "Of course there remains potential for wide fluctuations in both old crop and new crop feed prices."
In recent months, there's been a lot of talk about hog herd expansion. But, Hurt has been on the side of caution in this argument. Now that the profit outlook's chilled a bit, it's more important than ever to reconsider expansion plans, at least through this fall.
"Even with a return to normal yields in the U.S. this summer, much lower feed prices starting this fall would only provide pork producers with a breakeven outlook extending throughout 2013. Breakeven does not sound encouraging, but that covers all production costs including feed, a full labor return and full depreciation recovery on buildings and equipment," he says. "Last fall and winter the hog outlook was more positive and may have caused some to be interested in expansion. I have consistently warned that producers should wait on expansion until the 2012 U.S. corn and soybean production was assured. That is even more important now that the hog price outlook is lower."
