View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

The Agricultural Newsletter
from the Federal Reserve Bank of Chicago
Number 1899

April 1998

AgLetter
HOG EXPANSION STILL UNDERWAY
Large gains in pork production since last fall are weighing heavy on hog prices and causing losses among most
hog farmers. And based on the U.S. Department
of Agriculture’s most recent Hogs and Pigs report, that
trend is likely to continue into next year. The report
noted that the number of hogs and pigs on U.S. farms
as of March 1 was up nearly 8 percent from a year earlier. On a somewhat more positive note for producers,
however, the report suggested that the rate of expansion
is slowing. Reflecting this, the inventory of hogs held for
breeding purposes was reported to be up only 2 percent.
The latest quarterly report summarized the expansion
among hog producers since December. It also contained
revisions to the data from earlier reports, confirming that
the expansion last year exceeded previous estimates.
For example, the hog inventory estimate for December 1
was revised upward nearly 2 percent, pushing the yearover-year gain in hog numbers as of that date up to 8.5
percent. The updated numbers since then imply the rate
of expansion eased slightly this winter. The estimate of
actual sow farrowings during the three months ending
February was slightly less than what had been indicated
as producers’ farrowing intentions last December. That
coupled with a below-trend rate of increase in pigs per
litter helped limit the year-over-year rise in the DecemberFebruary pig crop to 8 percent.
A much slower rate of expansion will likely occur
this spring and summer. As noted, the March 1 inventory
of hogs held for breeding purposes was up only 2 percent
from a year earlier. Moreover, producer intentions for
sow farrowings during the March-May period now
point to a year-over-year gain of 3 percent while those
for the June-August period imply a gain of 2 percent.
The indicated farrowings, adjusted for the trend rate of
increase in pigs saved per litter implies the spring
(March-May) and summer (July-August) pig crops will
likely register year-over-year gains of around 5 and 3
percent, respectively.
Year-over-year comparisons in hog numbers vary
widely by state. In a reversal of the recent past, the current
cyclical upturn in hog numbers is more pronounced in

states comprising the Seventh Federal Reserve District
than elsewhere. However, the expansion here in the
Midwest is focused more on hogs being raised for market
than on those held for breeding purposes. The March 1
inventory of hogs in Iowa, which has far more hogs than
any other state, was up a sixth from a year ago. But all
of that gain was in market hogs. Among the other four
District states—Illinois, Indiana, Michigan, and Wisconsin—
hog numbers were up about 7.5 percent, paced by an 11
percent rise in Indiana. Indiana was the only District
state to record an increase in hogs held for breeding purposes. The estimates for the other 12 major hog-raising
states were mixed. Those for North Carolina, which
remains under a moratorium on new and expanding hog
operations, show a rise of only 1 percent. But a proportionately large share of the rise for North Carolina stemmed
from a 5 percent increase in hogs held for breeding purposes. Oklahoma recorded the largest rise (29 percent) in
hog numbers, with very large gains in both those held for
breeding and those held for market. Other states recording
relatively large gains (mostly in market hogs) included
South Dakota, Minnesota, and Ohio.
The expansion in hog numbers that started a year
ago has turned into a major upswing in available pork
supplies to domestic consumers. Commercial pork production in the first half of last year was down 2.5 percent
from the year before and—on a trade-adjusted, per capita basis—was the lowest first-half total for any year since
1978. The turnaround in pork production began very
modestly last summer and then swelled to a 7 percent
year-over-year gain in the fourth quarter. The gain widened to 12 percent in the first quarter of this year, pushing
pork production—on a per capita basis—to the highest
for the period since the early 1980s.
The current inventory of hogs on farms implies the
year-over-year gains in pork production will remain
large for several more months. The gains for both the
second and third quarter will probably approximate 10
percent. Thereafter, for the fall and winter months the
gains will probably narrow appreciably, perhaps retreating
to the 2 to 4 percent range. Despite the moderating
gains, however, per capita pork supplies will hold near
earlier cyclical highs.

The upswing in hog numbers is the most significant
factor influencing hog prices and producer earnings. But
at the margin, trade developments are also a factor. Net
imports of live hogs—mostly from Canada—have escalated
in recent years, offsetting the benefits of rapidly growing
pork exports. In 1997, net hog imports were four times
the level of three years earlier and, at 3.1 million head,
equivalent to 3.4 percent of the hogs processed in domestic
packing plants last year. Hog imports were especially
heavy in the fourth quarter and into the early part of this
year. The growth in net pork exports, which also hit a
new high in the fourth quarter of last year, has only partially countered the inflow of live hogs. In 1997, net pork
exports reached 412 million pounds (carcass-equivalent
basis). That marked a significant turnaround from three
years earlier when the balance in U.S. pork trade registered 195 million pounds of net imports. Despite the turnaround, net pork exports absorbed only about 2.4 percent
of the pork that came out of U.S. packing plants last year.
The growth in net pork exports is expected to continue this
year, but at a much slower pace than in the recent past.
The upturn in pork production is taking a heavy
toll on hog prices and on producer earnings. During the
first quarter, hog prices averaged less than $35 per hundredweight, down nearly a third from the high year-earlier
level. Moreover, the first-quarter average was about $10
per hundredweight below the break-even cost of production for a typical farrow-to-finish hog farmer as calculated
by Iowa State University. The break-even cost of production has been slowly declining for the last year and a half
and further declines are likely in the months ahead, especially if the 1998 crop harvest achieves its potential. But
with hog prices likely to hold in the upper $30s and low
$40s the rest of this year, it’s doubtful that the operating
losses will end this year.
With the changing structure in hog production and
marketing, it’s not readily apparent where the operating
losses are being absorbed. The integration that has occurred
within the industry has tended to blend the income statements of input suppliers, hog farmers, and hog packers.
Where this is the case, lower earnings within one component can be offset by improved earnings in another component of the production chain. To the extent that some
farmers have become hog “growers” rather than producers, the low hog prices probably haven’t altered the fixed
contractual payments the growers receive for finishing out
other producer’s hogs to market weight. For those still
functioning as a traditional hog producer, the increased
use of quantity and/or quality premiums can translate
into returns that exceed what otherwise is suggested by
current hog prices. And to the extent that the rapidly
expanding use of contractual arrangements between

packers and hog farmers now include “window pricing”
arrangements, both the farmer and the packer are probably absorbing a portion of the indicated operating losses.
Under typical window pricing arrangements, the hog
farmer receives the entire amount when prices fall within
the window—say $42 to $48 per hundredweight. But
when prices fall below, or exceed the window, the hog
farmer and the packer often split the difference. Regardless of the changing structure and marketing arrangements,
it’s clear that the returns to assets used to produce pork
have declined substantially and, at some point, the curtailed returns will pull production back into a better
balance with market demand.

CORN USAGE ESTIMATES LOWERED
Continued disappointments in export sales and shipments
and a higher-than-expected March 1 quarterly stock estimate prompted the U.S. Department of Agriculture to
lower its estimate of total use of corn for the 1997/98
marketing year. With over half of the marketing year
now elapsed, the latest USDA estimates imply total usage
of corn this year will approximate 9.05 billion bushels.
That revised estimate marks a cut of nearly 3 percent
from the previous forecast but it still exceeds the 8.85
billion bushels of corn usage the previous marketing
year. The lower usage estimate implies carryover stocks
prior to the 1998 harvest will be slightly larger. At the
present estimate of 1.21 billion bushels, old-crop carryover stocks of corn this fall will be more than a third
larger than last year and the most since the end of the
1994/95 marketing year. As a percentage of annual usage,
however, the projected carryover stocks (at 13.4 percent)
would still lag the average since 1990/91.
Corn exports have proven very disappointing this
year. Preliminary indications are that for the first six
months of the 1997/98 marketing year, corn exports were
down nearly a fourth from last year’s pace. The USDA
now believes corn exports for the entire marketing year
will approximate 1.52 billion bushels, down 15 percent
from last year and 25 percent below what had been projected at the start of the marketing year. Some observers
believe the latest estimate may still prove too high.
The problems in U.S. corn exports this year encompass several factors. Foreign import demand for corn has
declined this year. But more importantly, U.S. exports are
facing increased supplies among other exporting countries.
Despite a large cut in China’s corn harvest last fall, its
role as a net exporter of corn has unexpectedly strengthened
so far this year. Likewise, more of the world import
demand for corn is being filled by a large increase in
coarse grain exports out of Eastern Europe and the

U.S. corn exports
billion bushels
2.5

2.0

1.5

1.0

0.5

0.0
1982

’86
’90
’94
crop marketing year ending Aug. 30

’98*

*Projected.
Source: U.S. Department of Agriculture.

Former Soviet Union. More recently, the large harvest
underway in Argentina has added substantially to the
exportable supplies available in that country during the
rest of this marketing year and into the early months of
the 1998/99 marketing year.
Domestic usage of corn is more difficult to gauge.
The estimates of domestic usage hinge largely on residual
calculations that subtract out known uses from available
stocks. An earlier quarterly stocks estimate (for December 1) implied a strong rise in domestic corn usage for
the first three months of the marketing year. But the
implied domestic usage rate for the early part of the marketing year is especially vulnerable to residual miscalculations that might arise from over- or under-estimating
the size of the fall corn harvest. The recently updated
March 1 quarterly stock estimate for corn implied domestic
usage this winter was up only marginally from the year
before and well short of the pace indicated earlier. Accordingly, the USDA lowered its estimate of domestic usage
of corn for the entire 1997/98 marketing year to 7.52 billion bushels. The revised estimate is more than 2 percentage points lower than the previous forecast, but still 6.7
percent above domestic usage the previous marketing
year and 4 percent above the previous high in 1994/95.
Over three-fourths of the corn used domestically
is classified as that which is either fed to livestock and
poultry or used in some other residual (unmeasured)
capacity. Hog numbers are up considerably from a year
ago. But the rise in poultry numbers has been less than
expected and earlier year-over-year gains in the number
of cattle in feedlots have now evaporated. These developments underscore the downward revision in the estimate
of domestic corn usage.

While usage of corn is proving to be less than expected,
a recent survey of grower planting intentions suggested
the area seeded to corn in 1998 may increase only marginally. The survey indicated that farmers plan to seed
some 80.8 million acres to corn this year. Such a level, if
it materializes, would be the largest since 1985 but up less
than 1 percent from last year. Most of the indicated increase
in corn acreage was for southern states and Kansas, as
well as for the Dakotas and Minnesota where extensive
flooding cut corn acreage last year. Most states in the
Corn Belt will apparently reduce corn acreage slightly
this year. Farmers in the five District states plan to reduce
their corn acreage by 1 percent. Declines were indicated
for all District states except Iowa where the intentions
point to no change in corn acreage this year.
The intended corn plantings could be altered, depending—in part—on market trends and weather conditions
during the planting season. Likewise, weather patterns
during the growing season will be the key variable in
determining the share of the acreage that will be harvested
for grain and the average yield per acre harvested. Under
“normal” conditions, however, the indicated corn seedings
would be expected to result in a harvest of 9.6 billion
bushels this fall. Unless next year’s recovery in exports
exceeds current expectations, a harvest of that size would
be ample enough to cover usage in the year ahead.
This issue marks the end of my 28-year affiliation with AgLetter and the Federal Reserve Bank of
Chicago. It has been an enjoyable experience. My
thanks to all who, over the years, have shared with
me their knowledge of Midwest agriculture and their
thoughts on AgLetter.
Gary L. Benjamin

AgLetter (ISSN 1080-8639) is published monthly by the Research
Department of the Federal Reserve Bank of Chicago. It is prepared by
Gary L. Benjamin, economic adviser and vice president, Mike A. Singer,
economist, and members of the Bank’s Research Department, and is
distributed free of charge by the Bank’s Public Information Center. The
information used in the preparation of this publication is obtained from
sources considered reliable, but its use does not constitute an endorsement of its accuracy or intent by the Federal Reserve Bank of Chicago.
To subscribe, please write or telephone:
Public Information Center
Federal Reserve Bank of Chicago
P.O. Box 834
Chicago, IL 60690-0834
Tel. no. 312-322-5111
Fax no. 312-322-5515
Ag Letter is also available on the World Wide Web at
http://www.frbchi.org.

SELECTED AGRICULTURAL ECONOMIC INDICATORS

Percent change from
Latest
period

Value

Prior
period

Year
ago

Two years
ago

Prices received by farmers (index, 1990–92=100)
Crops (index, 1990–92=100)
Corn ($ per bu.)
Hay ($ per ton)
Soybeans ($ per bu.)
Wheat ($ per bu.)
Livestock and products (index, 1990–92=100)
Barrows and gilts ($ per cwt.)
Steers and heifers ($ per cwt.)
Milk ($ per cwt.)
Eggs (¢ per doz.)

March
March
March
March
March
March
March
March
March
March
March

103
112
2.53
97.50
6.42
3.34
95
35.70
64.20
14.50
69.9

2.0
1.8
–0.8
0.3
–2.3
2.1
1.1
–1.1
1.4
–1.4
8.0

–5
–5
–9
–4
–19
–15
–4
–28
–5
7
–3

–6
–13
–28
22
–8
–34
1
–28
7
5
–12

Consumer prices (index, 1982–84=100)
Food

March
March

162
160

0.2
0.2

1
2

4
5

Production or stocks
Corn stocks (mil. bu.)
Soybean stocks (mil. bu.)
Wheat stocks (mil. bu.)
Beef production (bil. lb.)
Pork production (bil. lb.)
Milk production* (bil. lb.)

March 1
March 1
March 1
February
February
March

4,937
1,203
1,166
1.98
1.46
11.8

N.A.
N.A.
N.A.
–8.3
–10.8
13.2

10
14
42
3
11
1

30
1
42
–3
3
3

Receipts from farm marketings (mil. dol.)
Crops**
Livestock
Government payments

December
December
December
December

19,755
11,062
7,954
739

–6.1
–16.8
3.2
N.A.

3
2
2
42

13
13
5
835

Agricultural exports (mil. dol.)
Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)

January
January
January
January

4,809
141
120
84

–8.3
17.0
–21.0
3.5

–4
–25
–1
58

–13
–24
34
–18

Farm machinery sales (units)
Tractors, over 40 HP
40 to 100 HP
100 HP or more
Combines

March
March
March
March

8,033
4,693
3,310
562

57.7
61.5
51.1
14.0

20
28
8
41

34
39
27
22

N.A. Not applicable
*20 selected states.
**Includes net CCC loans.
AgLetter is printed on recycled paper
using soy-based inks

Return service requested
Federal Reserve Bank of Chicago
Public Information Center
P.O. Box 834
Chicago, Illinois 60690-0834
312-322-5111

AgLetter

PRESORTED
FIRST-CLASS MAIL
ZIP + 4 BARCODED
U.S. POSTAGE PAID
CHICAGO, ILLINOIS
PERMIT NO. 1942