Hog Cycle Circles Round and Round

Fluctuations in live hog prices have been a roller coaster ride. The dramatic rises can get your blood pumping with excitement and the sudden free-falls certainly can make you nauseous.

The hog cycle has always been volatile, but in recent cycles, prices have responded more unpredictably to production changes than ever before.

Prior to 1997, the long-standing rule was a 1 percent change in production led to a 2 percent change in price. But since 1997 that ratio has been three-to-one, four-to-one, or at times huge numbers like 20-to-one, according to Ron Plain, University of Missouri agricultural economist.

This was apparent in the infamous market crash of 1998, but also in the dramatic price recovery that occurred this spring. For example: During April, Plain and his colleague Glenn Grimes note that a 6 percent decline in pork supplies led to live hog prices that were 61 percent higher than a year ago.

"We're experiencing a phenomena where hog prices are much more volatile, while the production is less volatile than it has been in the past," says Chris Hurt, agricultural economist at Purdue University.

Theories abound as to why prices are more volatile, and it's probably a combination of several things.

This spring's price recovery was the direct result of a strong demand for pork, with bacon leading the way in the restaurant and fast-food trade.

"Smaller production swings have more effect on the current market, because of the strong economy," says Greg Goebel, market analyst for Professional Marketing Associates, Mankato, Minn. "This is strictly a demand-driven market, it's not so much a result of tightening supply."
But that's just one specific example, general trends are more complex. Hurt cites a mixture of reasons, such as environmental regulations, industry structural changes and grain policy changes as contributing to the problem. Hurt also sees the meat market as a reason for pork's more inelastic demand.

"Retail prices don't seem to have dropped in response to supply increases as aggressively as in the past," says Hurt. "That means producers make up more of the price adjustments. Ideally, live hog prices are passed on to consumers as well, but structural changes at the wholesale and retail levels may have changed that."

Plain believes the cause stems from changes in the pork chain, citing less flexibility in packer operating margins. "Packers used to have a lot of single-shift plants and if extra hogs came through they could expand fairly easily and absorb the larger runs," says Plain.

In the late 1980s and early 1990s many plants began double shifts for economic reasons. Double-shift plants can't add additional overtime, because there wouldn't be enough time to shut down and clean the plant.

As for the pork production cycle itself, it remains similar to the expansion and liquidation pattern that has been the norm for years.

"People have been forecasting the death of the hog cycle for 30 years, but the hog cycle has been very resilient to industry change," says Plain.

The cycle generally runs 3.5 to four years between production peaks, on the average. This varies depending on certain factors – most notably is feed-grain prices. Nothing can slow expansion as quickly as expensive corn.
"The big reason we get off a hog cycle is grain prices. Weather doesn't work on a four-year cycle," says Plain.

For now, pork production is expected to be low for the remainder of this year and into 2001. So, hog prices are expected to be high during this period.

"This spring we had a strong run-up in the lean-hog futures market and the cash market couldn't keep up," says Goebel. "If the cash market doesn't hit $60 on a lean-hog basis by June, we've probably seen the cycle price peak. If the cash runs up that high, then the price peak should occur in July or August of this year."

By 2002 and 2003 expansion will return and production will again push higher and prices will move lower. The next production peak is expected in the fourth quarter of 2002. And keep in mind, producers will be expanding from an already high production base.

To make matters worse, after Smithfield buys Farmland's Dubuque plant, hog slaughter will no longer occur there and packing capacity will have dropped another 11,000 hogs a day. Experts believe additional packing plants could shut down before the ominous 2002 date.

"Producers will continue to face enormous amounts of price risk," says Plain. "In the last four years, prices have ranged from $8 per hundredweight to $68 per hundredweight. That's a tough world to live in."

Unfortunately, that price swing may not be an aberration. Plain says it is possible for live hog prices to dip lower than they did in 1998.

However, on the plus side, no one can say that the industry is standing still and ignoring these problems. Finding ways to move further along the pork chain and add value to pork production are the industry's hottest topics today.

With the formation of Pork America and countless state and local cooperatives and alliances, you are tuning into the price and value message. If co-ops and alliances continue to develop in time for the next hog cycle's production peak, your hogs could be spoken for before they are even born. This could alleviate the strain on packer capacity.

"If we get enough hogs under secured supplies, we could avoid repeating the fourth quarter of 1998 in the fourth quarter of 2002," says Plain. "Efforts to build a link between production and slaughter should help eliminate the extreme lows in hog prices."

Of course, if the production increase is tied to contracts linked to the cash market, the impact could mirror 1998, says Goebel.

Naturally, no one can see into the future. While the production side of the hog cycle has remained historically sound, hog prices have reacted much more violently to changes. That adds another degree of difficulty to forecasting the future economic conditions.

But it does appear there will be two profitable years before another crisis. You have that time to prepare, and there are some possible solutions. But, if the status quo remains, don't be surprised if the worst comes true. After $8 hog prices, certainly $4 is a possibility.