Hog producers were ready for the price downturn they are facing.
And they are ready for it to last another year, if the pattern of the hog price cycle stays true.
But they weren’t ready for prices to fall in July. That is the one time they assumed they would get some relief from the slump, says SPI Marketing general manager Don Hrapchak.
“Producers didn’t expect that. I think they all recognized it would be tough for the next 12 months but were counting on July and August prices to help them through.”
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Usually prices jump in July and August, when production generally slows. This year, prices dropped.
Hogs are now selling for between $130 and $140 per hundred kilograms, substantially below the cost of production.
Prices are expected to fall further in the fall. September to December hog futures are selling below $110/ckg. Last year, at the top of the four-year cycle, the average price was $177/ckg.
The slump began in December 1997.
While most producers are expecting to see the downturn last another year, there are some factors worrying industry watchers, Hrapchak said.
Usually low prices are caused by high hog numbers. The low prices push some producers out of the market, lowering supply. Prices rise because supply is limited, and the cycle is complete.
But this time it may take longer to cut supply, Hrapchak said. A big share of North American hog production now comes out of large-scale hog barns that carry a high debt load.
If these get into financial trouble and the owners go bankrupt, the banks who seize control of barns are unlikely to let them sit empty, Hrapchak speculated.
They’ll want some return on their money, so they might continue production in the hopes of recouping their investment.
Because of this, hog numbers could remain higher for longer, keeping prices depressed.
Another factor that could deepen the downturn is the same assumption that much of the United States’ increased pork production is based on: That there is a large export market for pork. Hrapchak said American production began shooting up in 1993-94, when the U.S. went from being a net importer to a net exporter.
Canadian pork promoters have also focused on the world market as a place to sop up all the production governments want to create.
“We’ve pinned a lot of our hopes on the export market,” said Hrapchak. But the Asian crisis has knocked out one of the most lucrative markets and there are few signs that those economies are recovering, Hrapchak said.
Producers will have to wait a few months to see how the price slump will affect supply, which this year is eight to nine percent higher than last year.
“We’re at the beginning stages.”
