After several years of struggling to earn a profit, pork producers could find themselves back in the black in 2012, says a Purdue Extension agricultural economist.
Profits in 2012 are forecast at about $17 per head, which would be the highest since 2006, Chris Hurt said. In 2006 corn prices were $2.30 per bushel, compared with the $6-$7 per bushel this year, and hogs were bringing a profit of $27 per head.
According to Hurt, while a return to profitability is welcome news, it seems there are more broad implications.
"The pork industry, like most other animal industries, has made the adjustments necessary to live in a world of high-priced feed," he said. "It also looks like the pork industry has probably 'turned the corner' on high feed prices heading into 2012."
Some factors contributing to lower feed costs in 2012 include abundant and cheap feed wheat, potential moderation in the rate of growth in corn use for ethanol, the prospect of a larger South American soybean crop, and hope for a return to higher U.S. corn and soybean yields in 2012.
The pork industry has struggled to adapt to higher feed prices in recent years due, in part, to the recession. But hog producers took another hit when the H1N1 virus was initially called "swine flu," even though it was a human virus spread by people. At the start of the recession in 2008, hog producers lost an estimated $17 per head, and in 2009 the losses increased to $24 per head.
"These large financial losses resulted in some downsizing of the industry through discouragement and bankruptcy," Hurt said.
Between the industry downsizing and exports increasing, the amount of pork available to U.S. consumers has dropped from about 51 pounds per person in 2007 to an estimated 46 pounds per person in 2012. According to Hurt, that reduction has helped retail pork prices climb from $2.87 per pound in 2007 to $3.43 per pound in 2011—a 20 percent increase.
Pork producers initially began returning to profitability in 2010, with an average profit of $10 per head. In 2011, that number increased to $14 per head.
But those numbers don't tell the whole story.
Because so much was lost in 2008 and 2009, it will take the combined profits from 2010, 2011 and 2012 to allow farmers to catch up financially.
"It has taken three years just to get back the money lost in the two bad years when feed prices surged," Hurt said. "Another way to look at this is to say that the pork industry adjusted to $7 a bushel corn such that they can now break even if cash corn prices stay at that level, and can make money if prices are below $7. Current prospects for cash corn prices to be in the lower $6 area is a primary reason for the profit opportunity in 2012."
Even with corn prices down and seemingly more abundant prospects for affordable feed, Hurt was cautious about suggesting the peak in feed prices is over.
"Are feed prices now moving into their post-peak period? No one can know the answer with much confidence," he said. "With the declining prices of corn and soybean meal since August, many will be debating the issue."
Hurt said he would expect the post-peak price feed period to not only come with lower feed prices but also with less volatility— both conditions that could favor animal production expansion.
He said that doesn't mean pork producers should throw caution to the wind.
"Of course, pork producers do not quickly forget $7 to $8 corn prices and should be cautious in quickly expanding herds," Hurt said. "Perhaps the best and most logical advice is for pork producers to use the expected profitability in coming months to enhance their financial positions and to wait and see how the 2012 U.S. crops evolve before moving toward expansion in late 2012."