No profits for pork until 2010

Were it not for the impact of the H1N1 virus, U.S. pork producers would be about break-even right now.

But because of the drop in demand due to the wrongly named virus, it will likely be well into 2010 before producers see any black ink, Glenn Grimes, University of Missouri economist, said at a market outlook session at the opening day of the World Pork Expo June 3, in Des Moines, Iowa.

Producers have been losing money since 2007, one of the longest periods of losses in recent history.

“No question, at the time when we should have had a rally in prices (this spring), we had really had news," said Grimes.

Grimes estimates the total losses from H1N1 during May to be $113 million and $141 million in June. Total losses to U.S. producers from the virus outbreak through August may be as much as $500 million.

Yet despite two years of losses, sow numbers have not yet been reduced to bring supply and demand into balance.

“We have to downsize and we have to downsize substantially,” Grimes said.

The only producers making any money, he said, are those who locked in futures prices at levels above $70/head, which was possible prior to the outbreak of H1N1 April 24.

For the first time in the past 20 months, futures markets gave producers the opportunity to lock in profits, both with higher hog price expectations and lower feed prices earlier in the year. The outlook for both has now changed.

On March 1, the U.S. breeding herd was down slightly from the previous year.

“But we have to be down a minimum of 5%, maybe 10%,” he said.

In addition, he said, hog weights have been increasing “at a time when we don’t need it.”

H1N1 notwithstanding, the losses of the past two years have not been due to weak demand, but rather to high oil prices, high ethanol demand, and as a result, high feed prices, which has meant red ink.

The problem of the past two years has not been demand, it’s been cost. Going from $2/bu corn to $4/bu corn means that “producers have to cut down the hog herd and we have not done that.”

One reason why, he says, is continued increases in productivity, which has been improving at a rate of about 2% per year.

Through March, demand for pork in 2008 had been in positive territory, similar to poultry, while beef demand had been a negative, he said.

From 1980 to 2008, pigs per litter have increased from 7.5 to 9.5, litters per sow per year have increased from 1.6 to 2.2 and pigs per sow per year have increased from 13-14 in 1980 to above 20 in 2008.

“These are dramatic changes,” Grimes said.

The bright spot for the industry the past two years has been pork exports, he said. Last year saw a 6% to 7% increase in demand for U.S. hogs, “and most of that was exports.”

In 2008, U.S. exports were up 46.6% from the previous year, but are expected to decline 13.2% this year, Grimes said.

European Union pork exports, meanwhile, were up 33.4% last year, but will likely decline by 27.1% this year.