Will hog profitability lead to expansion?

As of July 1, Canadian hog numbers were 1.3 per cent higher than a year ago, according to Statistics Canada. Record profitability in the sector seems to have finally restored some confidence in the industry. With profits estimated to hit as much as $100 per head, the question for producers is, how long will this profitability last?

To understand where we are heading, we need to realize how we got here.

Difficult economic conditions in the hog business led to an 11 per cent decline in the size of the Canadian hog herd between 2007 and its low in 2009. It has since increased 3.7 per cent, leaving the Canadian hog herd with 1.1 million fewer hogs than in 2007.

In comparison, U.S. hog inventories shrank five per cent from 2007 to a low in 2010. By 2012, it had increased three per cent. However, in the last year the U.S. herd size decreased by three million animals, a magnitude of about one-fifth of the total Canadian herd. The recent decrease can be attributed to Porcine Epidemic Diarrhea virus, which has spread across much of the U.S.

Hog prices have increased dramatically due to the reduction in the number of marketable hogs and worries about securing supplies. At the same time, feed prices have dropped. Corn prices have fallen by nearly 40 per cent compared to a year ago, reducing feed costs. Corn futures suggest those moderate prices could last for the next two years.

One indication of profitability in the sector is the hog-to-corn price ratio: the higher hog prices are relative to feed prices, the higher producers’ profits are.

The hog-to-corn price ratio is currently the highest it has been since early 2005. The ratio did not stay at these levels for long then, and it’s not expected profits will stay near record highs this time either. Our chart shows that current profitability is expected to start declining into the fall, and again into 2015. However, the hog-to-corn ratio is expected to remain above the level of the period from 2007 to 2013. All this comes despite the Russian ban on imports of Canadian pork.

While current profit margins for pork producers are substantial, making business decisions based on current prices seems ill-advised. Without another round of PEDv emerging in the U.S., profit margins will start to revert to more normal levels. Futures markets suggest producers’ profits are expected to remain above break-even through to the end of 2015.

With the opportunity to repair balance sheets, the seeds may now have been sown for a cautious expansion in the Canadian hog industry.

Source: FCC