Source:  Tom Johnston, MEATINGPLACE.COM, 6/4/09

Kerplunk — the sound of pork producers' hopes for profitability this summer.

The hog futures market bottomed out Tuesday afternoon as the industry is showing no signs of returning to profitability even during the traditionally profitable summer months of May, June, July, August and September.

Purdue University economist Chris Hurt told Meatingplace indications are the profitability that hog producers were holding out for after suffering 18 months of losses will continue to elude them at least until spring of 2010 as grain prices rise, hog prices stay low and export demand lags from the H1N1 fiasco.

"What we've had is these factors have just overwhelmed the seasonal increases," Hurt said. "If you can't make money in these five months, there's a reasonable chance you're going to be operating at a loss through the fall and through next winter."

At a loss

On April 24, the day that news of H1N1 began to spread, USDA's national lean carcass price was roughly $61.97 per hundredweight. On Tuesday, the price closed at $57.39. The drop in price has reduced the value by $7.23 per head.

Meanwhile, corn prices, based on July futures, have increased 58 cents to $4.43 per bushel and soybean meal, also based on July futures, have increased by $62 per hundredweight. The combination of those has increased production costs by $12.46 per head since April 24.

The combination of the $7.23 reduction in value and $12.46 rise in production is nearly $20 of lower margins. By Hurt's estimates, hog producers lost about $16.58 per head in 2008. By April, 2009 they were only losing about $5 per head. But now that gap has widened to a nearly $25 loss per head.

"These are large losses," he said. "We're not likely to average these types of losses for the entire quarter, but they certainly are disappointing when you thought you'd be making $10 or $15 a head and now you're losing $25 a head."

Demand

Livestock analysts Steve Meyer and Len Steiner said in their Daily Livestock Report on Tuesday that all pork summer futures contracts, including lean hogs and bellies, closed limit down (300 points) on Tuesday. Lean hog carcass futures for June through October hit life-of-contract lows, and 2009 pork belly futures did the same.

Hurt said Tuesday's activity reflected "the ongoing realization that demand has been damaged more broadly" than producers had expected. Time will tell how long export markets turn up their noses to U.S. pork, but it's become clear that the H1N1 scare has had a very tangible impact on the industry.

More detrimental, however, have been surging grain prices. Hurt said the whole animal sector still hasn't adjusted to a lasting higher cost structure that has resulted partly from boosted ethanol production. A late corn crop planting season only exacerbates the problem by squeezing potential supply.

"The whole animal sector never got herds and flocks cut back enough to reflect the higher cost structure," he said.