August 22, 2002

Market Advisor: The Hog Cycle - Revisited

Tim Petry
Extension Livestock Economist

Hog prices and production continue to follow the distinct cyclical and seasonal patterns that have been characteristic of the industry for many years. The four-year hog price cycle results from prices increasing for two years and then decreasing for two years. Pork production cycles are opposite of price cycles and decline for two years and then increase for two years.

Seasonal price and production patterns are also opposite each other. Production is high and prices low in the spring, production is low and prices seasonally high in mid-summer, and production is again high in the late fall with usually the lowest prices of the year occurring.

Every four years the hog price cycle and the seasonal price pattern both bottom in the late fall. Hog prices were low in 1998 and are predicted to be cyclically and seasonally low again in the late fall of 2002.

During the first seven months of 2002, hog prices have averaged 23 percent lower than during January through July 2001. An obvious cause of this year’s cyclical price drop was the 3.24 percent increase in pork production. A slowdown in exports and a huge supply of competing meats, particularly broilers, also added to the price woes. U.S. pork production has increased an average of about 1.5 percent per year for the last 50 years. In those years when production was above 1.5 percent, hog producers suffered losses. In years when pork production averaged below the trend, producers have enjoyed profits.

The profitability of hog production will also be affected by the dry weather across much of the nation, including the Corn Belt. USDA’s August Crop Production report forecast feed grain production for 2002 to be down 7 percent from 2001. The projected corn price was raised 50 cents per bushel from the July forecast. Continued dry weather coupled with poor pollination of corn due to extreme heat in some areas of the Corn Belt could cause even higher feed prices.

USDA is predicting hog prices to be in the $28 - 30 per hundredweight price range for the fourth quarter of 2002. Prices averaged $37.50 per hundredweight in the fourth quarter of 2001. Annual prices for 2002 will likely average about $35 per hundredweight compared to $45.81 in 2001.

Negative profit margins are likely to continue into 2003 with relatively low prices and higher feed costs. However, forces are already in place that will lead to a reduction in cyclical pork production and a return to more profitable levels by the end of 2003 and into 2004. Sow slaughter has been ranging over 12 percent higher in 2002 than last year. An increase in the percentage of gilts in the barrow and gilt slaughter mix during June and July implies that producers have decided to reduce gilt retention.

Much of the cyclical change that occurs in pork production is usually from smaller operators who decide to sell corn instead of raising hogs when hog prices are low. They get back into hog production when prices move cyclically higher. However, Tyson Foods, Inc., one of the largest hog producers in the U.S., recently announced that it would close some company-owned and leased hog farms. In addition, Tyson said it would sever contractual relationships with 132 hog producers. The move is expected to reduce the total number of sows in its live hog operations by 30 percent.

For many years the argument has surfaced that the movement to larger, year-round hog production units would cause both the pork production and price cycle and the seasonal pork production and price pattern to disappear. Despite all the technological and structural changes that have taken place, both the cycle and seasonal patterns continue, and are likely to be alive and well into the future. Hog producers will need to continue to use risk management strategies to effectively market hogs.

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Source: Tim Petry, (701) 231-7469, tpetry@ndsuext.nodak.edu
Editor: Gary Moran, (701) 231-7865, gmoran@ndsuext.nodak.edu