An increase in lean hog prices and a decrease in feed costs have combined to reduce the drought's effect on the pork industry, a Purdue Extension agricultural economist says.
During the height of the drought, when December corn futures reached $8.49 per bushel and December soybean meal futures reached $540 per ton, markets anticipated heavy liquidation of sows. That feared liquidation dropped December lean hog futures to $70, and producers anticipated per-head losses of $50-$60, Chris Hurt said.
"A panic response might have been to cover substantial amounts of feed needs at record high prices, to forward-price lean hog futures before the outlook worsened or to just sell out altogether," he said. "Now that the damage from the 2012 drought is better known, those who did not panic are facing much smaller losses than what were feared at the height of the crisis."
In drought years, feed prices often peak at or just after the height of the drought, then decrease. That trend has continued in 2012, with December corn futures now near $7.40 per bushel and December soybean meal futures closer to $425 per ton.
According to Hurt, a $1-per-bushel reduction in corn prices and a $100-per-ton reduction in soybean meal prices lower hog production costs by about $12 per head.
"Lower feed prices are important to the reduction in anticipated losses, but improved lean hog prices have been even more significant," he said. "December lean hog futures are currently above $80, which represents at least a $10 increase over drought-induced liquidation fears in early September. A $10 increase in lean hog prices means more than a $20 reduction in anticipated losses."
The increased lean hog prices combined with lower feed costs have translated into reduced losses of about $30 per head - about 40% coming from the lower feed prices and 60% from higher lean hog futures, Hurt said.
That's not to say that sow liquidation didn't occur. Producers increased sow slaughter in early July and continued that trend through mid-October.
"During this 14-week period, sow slaughter averaged 4% higher than for the same weeks of 2011 and likely resulted in a national breeding herd reduction of about 2%," Hurt said. "In the weeks since mid-October, sow slaughter has dropped below previous-year levels as optimism for a much-improved outlook in 2013 was unfolding."
That optimism might be warranted. Hurt said a return to profitability could come as early as spring. While he estimates losses of about $15 per head will continue through the first quarter of 2013, live-hog prices are expected to reach the break-even point by early May. The second and third quarters of 2013 could bring a return to profitability of about $10 per head.
Lower feed prices could keep the pork industry profitable into fall 2013 and winter 2014, Hurt said.
But even with a projected return to profitability, he warned producers not to be hasty with thoughts of expansion.
"Some producers might want to jump the gun and get expansion started in the spring of 2013. But one glance at the current Drought Monitor tells us that normal crop yields in the U.S. for 2013 are far from assured," Hurt said. "The uncertainty should keep most producers from expansion fever until the crops are more nearly assured in late-July and August."
Hurt's full report and the accompanying podcast are available via Farmdoc Daily.