There's a lesson to be learned from how U.S. hog farmers -- some of them, anyway -- handled this year's drought.
Don't panic!
Just a few months ago, the drought was slashing its way through the hog sector, with $8-per-bushel-plus corn prices forcing many farmers to trim herd numbers. Many simply could not afford to keep them all fed.
But, the resulting market gyrations didn't follow the script exactly. The herd did get a trim, but so did corn and soybean prices, which cut into the $50 to $60/head losses that were projected earlier in the year.
"Now that the damage from the 2012 drought is better known, those who did not panic are facing much smaller losses than was feared at the height of the crisis. Feed prices tend to reach peak prices around, or slightly after, the peak of the drought and then move irregularly lower through the marketing year," says Purdue University Extension livestock economist Chris Hurt. "That pattern has been evident this year with December corn futures now near $7.40 per bushel and December soybean meal closer to $425 per ton. Lowering corn prices by $1 a bushel and meal by $100 per ton lowers hog production costs by about $12 per head."
Liquidation did happen, but not to the extent that most expected at the market's nadir. Then, feed prices started to moderate slightly and the hog market showed signs of life. Now, it looks like profitability -- while still out of the picture now -- will return in a few months.
"A return to profitability may be on the not-to-distant horizon by the spring of 2013. There still are losses to sustain for the rest of this year and the first quarter of 2013 when losses are estimated at about $15 per head," Hurt says. "But live hog prices are expected to increase enough to reach breakeven by early May 2013 and provide for positive returns of around $10 per head in the second and third quarters. Lower feed prices late next summer are expected to sustain a profitable industry into the fall of 2013 and winter of 2014."
Add to that mix a potential return to crop yields closer to trend next year and the industry could possibly take the next step beyond profitability. Just make sure you don't get ahead of yourself, Hurt says, because there's a lot that has to happen for that expansion potential to be realized.
"If U.S. and world crop yields are closer to normal in 2013 the pork outlook should brighten and thoughts of expansion will begin in the late summer of 2013. Some producers may want to 'jump the gun' and get expansion started in the spring of 2013," he says. "However, one glance at the current 'Drought Monitor' tells us that normal yields in the U.S. for 2013 are far from assured. This uncertainty should keep most producers from expansion fever until the crops are more nearly assured in late July and August."
And, between now and the next period of profitability in the hog business, if you need to rely on more operating loans to make ends meet, you won't be alone. And, Hurt says, the ag lending sector knows that.
"Pork producers who entered the drought in weak financial condition have had to rely on cash infusions from lenders. To their credit, lenders have generally supplied that capital and recognized that his downturn would be intense, but short," he says. "The era of high feed prices has been difficult for all of the animal production industries including pork producers who lost money in three of the last five years: 2008, 2009, and again in 2012. For those that did not panic, it now appears the sun will rise again and the dawn of profitability will once again return."
