Hog Prices at Ten Year Lows

Purdue University agricultural economist Chris Hurt indicated on Monday at the farmdoc daily blog (“Weekly Outlook: Hog Prices Join Corn and Wheat at Ten-Year Lows“) that, “It is interesting to be an observer of agricultural price movements. However, for many producers of agricultural commodities, prices are a key driver of their financial wellbeing. Wide ranging price movements over time can vastly alter their financial conditions. It is clear that the financial impacts of price movements affect many agricultural input businesses as well.

“What can happen to prices of agricultural commodities in a decade, and why look at the last decade? It is because it was 10 years ago in the fall of 2006 that agricultural commodity prices began to head upward in what can be described as a boom/moderation price cycle. Nearby futures prices are used to compare prices over time. Measured this way, prices for wheat, corn and lean hogs in the fall of this year fell to 10-year lows, dating back to 2006 or earlier. Unfortunately, costs of production are not at 10-year lows and this means narrow margins or losses are likely for many producing these commodities.

“Focusing on lean hog futures prices, the low this fall was on the October 2016 contract at $40.70. The previous time lean hog futures had been this low was in October of 2002. This means lean hog futures in the fall of 2016 were the lowest lead contract price in 14 years.”

Dr. Hurt noted that, “With current costs estimated at $49, this means losses for this quarter of about $34 per head and for the first quarter of 2017 of around $27 per head. The second and third quarters should be about breakeven, with loses of $19 in the final quarter of 2017.

The forecast of annual losses of about $11 per head in 2016 are expected to continue for 2017. More packer capacity will help hog prices in 2017. In addition, retail pork prices are expected to continue to drop and provide stronger domestic usage and pork exports are expected to grow in 2017 as well. Nevertheless, these positive factors will not be enough to bring the industry back to the breakeven level. The industry will need to consider a reduction in the breeding herd in the last half of 2017 in order to boost prices back closer to breakevens in 2018.”

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