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Outlook on Kentucky hog industry and hog/pork prices

 

University of Kentucky College of Agriculture, Food and Environment

 

LEXINGTON, Ky. — Prices for live hogs have increased 80 percent in the past five years. Grocery store pork prices have risen too, but not nearly as much, only by 30 percent. Nevertheless, pork prices are high – hitting record levels this summer. Closer to home, Kentucky Farm Bureau reported that pork prices rose more than any other food item, up 8 percent in their quarterly market survey. What’s led to the price increases? And, what is going on at the farm level in Kentucky?

The number of hog farms in Kentucky has declined to 70 percent of the number 10 years ago, 866 farms, and hog sales declined by 24 percent to 933,000 head. About 10 years ago, the 2002 USDA Census of Agriculture reported that Kentucky had 1,220 farms with a total of 987,000 swine. Of these, 81 (7 percent) had more than 1,000 head. According to the most recent census, 59 (7 percent) had more than 1,000 head. The larger operations dominate – their share of sales remained the same at 92 percent.

While the number of hog producers in Kentucky has declined, there has been a growth in the number of farms producing hogs on a contract basis. Independent producers accounted for 63 percent of hog sales in 2012, while contractors accounted for the rest (37 percent).

Prices are determined by national and international markets, supply, demand and interactions with other meats. According to the USDA, as of June 1, the number of hogs and pigs on U.S. farms was the lowest in seven years, even though global demand is strong. Pork exports for this year are up about 10 percent, accounting for more than one-fifth of U.S. production. Pork production tends to go up and down. In 2012, production rose 2 percent, but then declined slightly in 2013 and will be down another 2 percent this year. Per-person consumption has been trending down, from 50 pounds per person five years ago to about 45 pounds now.

Hog producers have been facing a very risky environment. Hog profitability is erratic, with very volatile prices. In 2009, prices dropped 12 percent, but then they rose 25 percent the next year. Prices are projected to be up 20 percent this year but down again in 2015. Cost of production changes. Corn price is a key input, and prices have varied dramatically, ranging from less than $4 per bushel to more than $8. And there are other issues as well. A surprising disease, only affecting pigs and new to the United States, Porcine Epidemic Diarrhea virus (PEDv) was found in U.S. pigs in May 2013. The disease killed about 8 million mostly baby pigs, according to Steve Meyer, a private industry analyst. That’s roughly 10 percent of the hogs produced in a normal year. Because they are baby pigs, it’s a much smaller percent of production but still dramatically reduces total production. And no cure has been found.

Kentucky hog producers’ whose herds have been infected with PEDv have estimated total production losses to be as high as 20 percent for 2014 based on the number of litters lost. Even with increased profit margins, financial consequences are severe for those whose herds get infected. Mortality rate for piglets born after contracting the virus on the farm is nearly 100 percent. Sows and older pigs contract the disease but usually recover. When PEDv strikes, the on-farm production cycle is depressed, and it takes a few months to return to full production. Potentially more troublesome, anecdotal evidence exists that attempts to immunize the herd through exposure may have a limited effect. Some farms have experienced more than one PEDv outbreak already.

While lots of resources are being put toward researching this disease, many unknowns still exist. The exact source of the disease as well as how it is being spread are still not understood. Those producers who have not been infected are dreading the upcoming winter as the disease thrives in cold temperatures. Kentucky pork producers along with the U.S. pork industry may be battling this disease for several years before herd immunity is built up or a cure is found.

Kentucky’s hog producers face all of these same problems, but reap the profits as well. Iowa State University calculations (reported by Ron Plain and Scott Brown at the University of Missouri) estimate the typical market hog slaughtered in June cost $56.80/cwt live to raise and earned a profit of $93.04 per head when sold. That breaks the old record profit of $92.35/head set in March. While profits are unlikely to remain at these record high levels, the enterprise should continue to be profitable. Reduced supplies and exports are likely to keep prices at near record levels, and corn prices have moderated compared to the highs of a few years ago.

 

This article was written by Lee Meyer and Jonathan Shepherd, agriculture economists at the University of Kentucky College of Agriculture, Food and Environment. The article first appeared in the July 28 edition of Economic and Policy Update.