Prices are up but hogs are not quite profitable yet

Thursday, May 8, 2008

by MARY BAXTER

Patrick O’Neil, sales manager with Ontario Pork, says prices have jumped from C$90 per hog to “the high C$130s” since the end of March. He attributed the rise to an increase in U.S. demand, noting that most of the spike occurred when there were a lot of hog supplies in the market. Wholesale pork prices moved up dramatically over the same period as well. The “last leg up” in price took place as U.S. hog numbers began to shrink and therefore has as much to do with supply as it does with demand, he says.

But O’Neil points out that futures markets suggest gains will likely be limited for the rest of the summer. And while the prices are better, “better is not necessarily good,” he notes, pointing out producers need about C$155 per hog to break even.

In Western Canada the industry has responded to low prices and high input costs by shipping pigs out before they can be finished. In turn, the U.S. spot market for early wean and feeder pigs is low and prices for these animals have dropped, O’Neil says.

While the low prices may be of some advantage to those operating finishing barns, Ken McEwan, an industry economist based at the University of Guelph’s Ridgetown campus suggests chances of breaking even remain difficult. “There will be individuals who can do that,” he says. “But on average, I think most producers would still find it difficult (to break even).”

He attributes the spike in live market hog prices to two main factors: the continued strong performance of U.S. exports and an increase in that country’s domestic demand. These two events have helped to boost what might have otherwise been a normal seasonal climb.

Nevertheless, “it’s very dangerous to be thinking that we’re out of the bottom of the doldrums of the hog cycle yet,” he says pointing out that there’s a strong potential grain prices will remain high. Moreover, it’s still a long way out on the Chicago Board of Trade futures before producers will see the C$1.50 to C$1.60 per kilogram prices they need to obtain break even production. By May 8, December hog futures were running at 80-90 cents: “It’s a year from now before one can hedge and begin to think about locking in a profit,” McEwan says.

Country of Origin Labelling (COOL) regulations under debate as part of the new proposed U.S. Farm bill further muddies the waters. McEwan notes that it’s unclear how the regulations will work their way through the marketplace or how the shortfall of pigs caused by these regulations will be replaced in the United States.

He also observes that the higher hog prices is going to “slam on the brakes” on packer profit margins as well.

However, McEwan did admit those who grow their own grain to feed their animals may see an opportunity to move back into the black from the red under current prices. He noted that about half of Ontario’s industry takes this approach to hog production. “This may bring some comforts,” he said.

But he emphasized that “one still needs to be cautious.” BF