Hog prices on the charts look great, but prairie producers’ profits are being squeezed and their confidence crushed.
They are still making money, but for how long?
“Paying five bucks for feed barley, which is what we’re doing now, even if you’re making money today, will you be able to a few months from now?” said James Hofer, hog production manager for the Starlite Colony at Starbuck, Man.
“I’ve never seen a situation like this where you’re looking down the road and … you can see so little.”
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Hog producers in Canada appear to be in an uneasy situation, with far more worries hanging over their heads than those experienced by U.S. farmers.
The high Canadian dollar and the sudden disappearance of a big slice of the Manitoba and Saskatchewan feed grain crop have made their medium-term future look uncertain.
Hog producers make their money on the spread between the feed grains they have to buy or produce to feed their animals and what they can sell the animals for. When feed grain prices rise, live animal prices have to rise proportionately to keep a farmer in the black.
When a farmer breeds a sow, the offspring are not ready for market for more than half a year, so being able to count on a profit spread over that extended period is a constant concern.
Chicago lean hog futures contract prices, upon which most North American prices are based, are at levels that would have been extremely profitable 10 years ago.
But with barley and corn prices also sky high, the spread is not particularly profitable now for Canadian producers.
While October 2011 lean hog futures have risen from $70 per hundredweight last June to a peak of $94 per cwt. this June, September corn prices rose in the same period from $4.20 per bushel to $7.60.
And the volatility is rattling producers’ nerves.
Hog futures prices have hopped around recently, moving from $94 to $84 to $90 to $87 since April.
Corn in the same period surged from $6.60 to $7.60 and then fell back to $6.06.
That makes calculating profit spreads a weekly task, and forecasting returns for the fall, winter and spring a perilous undertaking.
Hams Marketing risk management specialist Tyler Fulton said he was surprised by the recent U.S. Department of Agriculture’s Hogs and Pigs quarterly report that found American producers intend to produce slightly more pigs in the second half of 2011 than last year.
That was in keeping with most analysts’ expectations, but he thought U.S. producers might be cutting back because of the volatility.
He fears that demand for pork might have weaker foundations than many believe, which could damage consumption in the fall and winter.
“The U.S. consumer seems very willing to cut back according to price,” said Fulton.
However, booming U.S. export sales have kept the slaughter plants running at full capacity and have pushed packers to pay higher prices in the cash market for immediate deliveries than for further-out futures months, which would normally be at a premium.
The problem with assuming that galloping overseas demand will keep galloping is that prices could be hit hard if that demand slows.
“My concern is whether or not the export sector will be there the way it is now,” said Fulton. “Even if we saw equivalent to year-ago levels (of exports), we’d see a real shift down in prices.”
Hofer said it’s an odd situation for a hog farmer to look at February futures prices of $87 per cwt. and feel underwhelmed.
“Historically, that’s a very good price. But with our dollar and feed grain prices, it’s not great now.”
