Pigs eating

URBANA, Ill. — Pork producers are expected to struggle with hog prices below costs of production through the winter.

Record pork production and trade disputes continue to be the near-term drag on prices. However, according to Purdue University agricultural economist Chris Hurt, lean hog futures are more optimistic for spring and summer prices to be high enough to provide profitability in the second and third quarters of 2019.

What are the economic factors that are the foundation of this optimism, and will those higher prices actually materialize in 2019?

In a University of Illinois Farmdoc Daily news release, Hurt says pork production is expected to be higher by around 3 percent for the rest of 2018 and again in 2019.

“Trade conflicts have directly affected the U.S. pork industry. Trade disputes have limited U.S. pork sales in China and Mexico beginning last summer,” Hurt says.

Hurt adds that the overall trade picture looks more optimistic when viewed from a global perspective for multiple reasons.

“First, total pork exports to all destinations are up 6 percent. In addition, pork sales commitments through the week of Nov. 22 are also up 6 percent, and USDA analysts are using a 6 percent increase for their 2018 annual estimate,” he says.

“Second, the signing of the USMCA calms trade conflicts with Mexico and Canada. That trade agreement still needs approval in each country. In addition, it leaves in place the U.S. tariffs on steel and aluminum. It was these tariffs that caused Mexico and Canada to place restrictions on U.S. pork. Those tariffs still need to come off.”

And now, hope exists for a cooling of the trade conflicts with China. African swine fever in China is not under control, and China may import more pork and other meat products to compensate for lost hogs due to the disease, he says.

The lean hog futures market seems to exhibit more bullish enthusiasm by spring of 2019 even in the face of potential record pork production. Hurt says it is a reasonable conclusion to assume traders’ optimism is based on strong demand from a continuing strong world economy and anticipation of resolution to trade disputes.

The futures price premiums for mid-2019 are extremely high compared to nearby futures. This would seem to indicate traders expect some major economic factors to increase hog prices by spring and summer. As an example, the July 2019 lean hog futures, near $84 on Nov. 30, are about $26 higher than the nearby December 2018.

Using lean hog futures as a base, what are hog price prospects for 51 to 52 percent lean carcasses on a liveweight basis?

Hog prices were depressed in the third quarter of 2018 due to trade issues and averaged just $44. The outlook is for a similar price average for the fourth quarter this year. Winter prices are expected to strengthen into the mid-to-upper $40s. With the current optimism in futures markets, prices could move to the mid-$50s for averages in the second and third quarters. The final quarter of 2019 could then see prices drop back to the mid-$40s.

Hurt says estimated total cost of production is around $50 currently, and that may go up to $51 in 2019 with higher corn prices and higher labor, interest and building costs. Given current optimism in the lean hog futures for 2019, prices for the year would average near $50 compared to near $46 in 2018. That means 2019 would be a year near breakeven for farrow-to-finish producers. Losses would be the norm in the first and the fourth quarter with profits in the second and third quarter roughly offsetting.

“The bottom line is that the U.S. industry will be producing record pork supplies in 2019 and will need more open export markets and strong demand support. If not, another year of losses might result,” Hurt says.