Hogs and dairy cows have been the poster children this year for unprofitability. Unfortunately, there is no Jerry Lewis hero to come to the aid of pork producers and dairymen. It will be up to the consumer to bail them out, and charitable contributions have diminished along with the vibrant economy. We’ll offer a status report on the red ink in milk and pork.
Turkey producers observe Thanksgiving by giving thanks for a holiday that is nearly a federal mandate for consumers to buy their commodity. Apparently the red ink meat industries need a national pork loin holiday, followed by an ice cream summer, all in an effort to generate awareness and bolster sales.
For the dairy industry the problems began in 2008, says University of Illinois economist Brad Zwilling in a recent newsletter. He says the $19.21 per cwt was the highest average net price on record and above the lofty $18.83 in 2007. But on a per cow basis, total returns were $3,900 compared to the total cost of production of $4,021. Zwilling looked at Illinois dairy farms which averaged 20,297 pounds of milk per cow, in comparison to the all time high of 20,715 pounds of milk per cow.
Zwilling reports total costs and cash operating costs are in lock step and moving higher. Total costs were $2,500 per cow in 1999, but that rose to $4,000 at the outset of the current year. In the past five years, returns above all costs per cow have ranged from a loss of $763 to a gain of $209. The 2008 returns were about $1 per pound of milk less than in 2007 due to higher feed costs in 2008. While the price received for milk increased, so did both the feed and non-feed costs. Feed costs averaged $10.20 per 100 pounds of milk, and that is a record level, making up 52% of total costs. Non-feed costs of $9.59, were also at a record level.
For 2009 Zwilling says costs will likely exceed milk prices, meaning another year of red ink. While feed prices are lower, the milk price is also lower due to increased supplies and a weaker global demand for dairy products. For the current year, feed costs per 100 pounds of milk will average about $9.30. An estimated $9.65 for non-feed costs would bring total costs to $18.95 per 100 pounds of milk. Zwilling says that would exceed returns for the average producer by $5.95 per 100 pounds of milk produced.
The financial woes of the dairyman are shared by the neighboring pork producer, whose $40 live price is more than offset by production costs of $48 per cwt, says Purdue livestock economists Chris Hurt in a recent newsletter. He was optimistic earlier this fall that feed costs for 2010 would moderate, but his optimism faded with the 90 cent per bushel rise in corn prices. Hurt calculates production prices at farrow to finish operations to be around $50 in the coming year, which he describes as an insurmountable climb from today’s $40.
Hurt predicts hog prices to average $46 to $47 in the coming year with a potential touch of the $50 mark at mid-year. That is still a $10 loss per head and the third consecutive year of red ink. That causes Hurt to say, “The current financial reality likely means the herd will decline, demand will improve, and hog prices will be higher than the current forecast.” But he says other analysts predict better prices based on the market for lean hogs futures, which predict a breakeven scenario in 2010, rather than a loss based on the live hog market.
Summary:
Dairy and pork producers will soon be flipping the calendar to 2010, but their financial bottom line will be written with red ink that is left over from 2009. Livestock economists are predicting continued losses in the dairy and pork industries. In dairy, feed costs have softened a bit, but production costs will still overshadow milk prices by about $6 per cwt. In pork, lower feed costs have helped, but demand is still weak, supplies are large, and the market for live hogs indicates at least a $10 loss per head sold.