Middling Hog Prices, High Feed Costs Hurt Hog Profitability

The hog industry has changed in many ways over the past 10 years, but the end result for producers may be the same for a while. In October 2007, monthly hog slaughter topped 10 million for the first time, and then the feat was repeated in November 2007. Although prices did decline by 25% over a three-month period to 38 cents per pound in November, in some ways it is remarkable that prices held up that well. The hog packing and processing industry was better prepared to handle such volume this time around, and both domestic and export demand for pork are robust. Prices for competing products, such as beef and chicken, also are relatively high, limiting price pressure on pork.

While the absolute price of hogs looks much better now than nine years ago, the sector's profitability is suffering due to persistent high feed costs. The ratio of the hog price to the price of corn, a crude-but-effective measure of profitability, is at its lowest level since the end of 1998, because the price of corn is now about twice as high (and rising).

Given the hog industry's current profit picture, it was somewhat surprising to learn that U.S. hog producers are continuing to expand their herds. According to USDA's most recent Hogs and Pigs report, released in late December 2007, the breeding herd on December 1 had increased by 13,000 head from September 1, and was 1% higher than at the same time last year. The inventory of market hogs was 5% higher than last year, which was not as surprising, since that is the result of decisions made months ago.

Although hog producers may have more surprises in store, it is hard to believe that the expansion will continue much longer, especially in light of recent information. Hog producers have to be surprised (and not in a good way) at the fact that corn prices have actually continued to rise in the wake of the huge 2007 corn crop. Some recent expansion must have been in anticipation of a moderation in corn prices for 2008. Moreover, it will be difficult for hog prices to post a big recovery with large supplies of market hogs and the threat of increasing poultry production.