Hog producers must hit the brakes on expansion or they will face a pile-up of losses and bankruptcies caused by a supply glut.
A prominent American economist warns prices may drop below $30 (U.S.) per live hundredweight by the end of the year. There could be too many hogs and not enough space to slaughter them.
Canadian prices follow the American trend, although slaughter capacity here is ample.
“We’re intentionally trying to scare the hell out of people,” said Glenn Grimes of the University of Missouri explaining his price forecast.
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If enough small producers don’t get out of the industry, and if enough large producers don’t cut back on expansion, the industry faces a meltdown, he said.
“It means going broke on the part of quite a number of people.”
But two other economists think United States producers will heed the speed bumps thrown up by the widely respected and quoted Grimes.
Kelly Zering, economist at North Carolina State University, said he’s not quite as pessimistic as Grimes, but he doesn’t think it’s likely prices will rise much from current levels either.
“Perhaps recent prices and downward revisions in the futures market will have calmed some of those expansion intentions,” said Zering.
Bankers will help encourage producers to slow down, he said.
“With the current cash flows, some of the loans will not look as strong as they might have otherwise.”
Chris Hurt, economist at Purdue University, projects average U.S. prices for 1998 will be the lowest since 1974. And prices in 1999 will be even lower. He believes the worst will come between October 1998 and April 1999.
Historically, U.S. production and prices travel in cycles. Low prices spur farmers to cut production, leading to higher prices, and more production.
A large pool of small producers who can quickly enter and exit the industry have made the cycles possible, said Grimes.
But times have changed. Today, 37 percent of production comes from large operations with 2,500 sows or more.
Grimes has surveyed these producers, and found they planned to expand by 36 percent by the year 2000. His research shows large producers tend to meet their goals.
Since July 1, he has called more than half of them back to get an update. So far, they haven’t called off much expansion, even though more than half say they can’t make ends meet with prices below $40 (U.S.) per cwt.
Hurt believes the cycle will continue.
Farmers, especially those with fewer than 100 sows, who account for 29 percent of U.S. production, may give up, he said.
Large operations running over their capacity to capture strong margins will cut back to normal levels.
Some operations will fail, he said, especially ones with heavy debt loads after recent expansions.
“It may not happen as rapidly this time, but it will happen. People will not just keep losing money for month after month, year after year,” he said.
Grimes and Hurt predict stronger companies will use the bloodbath as a time to expand, buying vulnerable operations at a fraction of the cost of building new ones.
