Purdue Economist Predicts Higher Pricees, Livestock Herd Expansions

OMAHA (DTN) -- Lower feed costs may spark a livestock industry renaissance and return to profitability, a team of Purdue University ag economists said earlier this week.

"It's not just the start of a good year for the animal industry, but an era," ag economist Chris Hurt said during a webinar hosted by Purdue's Center for Commercial Agriculture.

Feed costs are likely to remain at or below the 2007-13 average, providing hog and cattle operations with opportunities to stabilize their finances and expand their herds after several tough years. USDA's latest forecast pegs 2014 average prices at $3.90 and $9.65 a bushel for corn and soybeans, respectively.

After three years of crop producers' incomes soaring, it's time for hog producers to reap record profits of up to $59 per head and for the cattle sector to capitalize on record calf, feeder and live cattle prices.

Neither industry is without challenges, like the porcine epidemic diarrhea virus in hogs or pasture condition delaying cattle expansion, and economists at USDA and Purdue make sure to mention that any corn or soybean production shortfall could still cause feed prices to reverse.

"If there's a drought, yes, we could see explosive prices, but not quite to $8," Hurt said, adding that livestock operators are better prepared to handle $6.50 corn now than they were a few years ago. "The odds of that are fairly low, but they're out there."

PORK SUPPLY DOUBTS SHOULD BOLSTER REVENUE

There's no national organization that tracks piglets lost to the PED virus, so economists like Hurt rely on information from producers to gauge the supply impact. Even that information is mixed, he said, as some farms have reported tragic losses and others report mild to no infections.

"This makes it very difficult to know what the magnitude is, and that adds a lot of speculative fever to the trading floor in Chicago," he said.

While the disease may cause tough losses for producers, pork demand is inelastic -- consumer demand isn't very price sensitive -- and that will generally raise revenue across the industry. For every 1% decline in supply, live hog prices increase about 2.2%, he said. For example, if total supply declines 4%, then prices might be 8.8% higher. "If the market felt prices would be $72 live before PEDV, then a 4% reduction in supply might raise live prices about $6.35 to $78.35."

Hurt said current futures prices seem to indicate the market is expecting a 3% decline in pork supplies. He thinks continued increases in hog weights will offset the decline in head, and sees pork supplies increasing about 1% by the end of 2014.

The market is indicating losses due to PED virus will be most dramatic in the second quarter of the year (April, May, June). Live hog futures are trading around $79, but the latest forecast from USDA's Economic Research Service puts second-quarter prices in the $64 to $68 range.

"USDA has not come to grips yet with the losses due to PED. The market is trying to price them in," he said.

Per-head profits could soar to a record $58 by the second quarter of 2014, Hurt estimates. That'll slide to an estimated $49 in the third quarter, before returning to the $20 to $30 profit per head range for the rest of 2014 and into 2015.

"Obviously it's going to increase revenues for the entire industry," Hurt said. "It will, however, also raise the cost of raising pigs." That means for operations heavily hit by PED virus, the costs could overwhelm the enhanced revenue. But for farms with average or light infection, the benefits of higher prices will likely exceed the disease's costs.
Purdue economists forecast one of the longest periods of profitability for hog farmers since 2007. (Chart courtesy of Purdue University)

CATTLE SUPPLIES TO TIGHTEN THROUGH 2016

Cattle slaughter could fall to about 29 million head by 2015, a 10% decline from 2013, as cattlemen retain heifers and keep momma cows in their herds in their efforts to expand, Purdue ag Extension economist Jim Mintert said.

Beef production could decline 9% by 2015, which would keep prices high throughout the cattle complex. He sees average prices for fed cattle, based of Kansas slaughter steers, rising to $135 cwt by 2014 and $145 cwt by 2015.

"Tight calf supplies, record-high fed cattle prices and lower feed costs will lead to record-high calf prices," Mintert said. "I remember it was quite an event to see calf prices break through $100, and now they're averaging in the ball park of $200 cwt." Calf prices, based on 500-600 lb. steers, will likely remain around the $200 cwt mark through 2015.

Cheaper grain prices will help cattle feeders enter the most profitable period since 2010-11, Purdue Extension ag economist Michael Langemeier said. Cattle feeders saw a profit of more than $100 per head in January and February of 2014 on lower feed costs and higher-than-expected cattle prices.

The feed cost of gain dropped below $100 for the first time since late 2010, and he sees it continuing to fall into the mid-$80 range by summer.

Cattle finishing is a margin game, and producers have to be aware of higher feeder cattle prices, but "certainly from a fed cattle price perspective and feed perspective, it looks like a good situation for cattle finishing," Langemeier said.

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