Outside Forces Influence Pork Business

Editor’s note: The following was written by Lee Schulz, Iowa State University Extension economist, for the April Ag Decision Maker newsletter.

Pork producers appear to be factoring in those outside uncertainties and tapping the brakes. The March 1 inventory of all hogs and pigs on U.S. farms is 7.3% smaller than at its last peak of 78.583 million head on Sept. 1, 2019, according to USDA’s latest Quarterly Hogs and Pigs report.

Inflation may push pork and hog prices higher, but inflation and higher interest rates will boost production costs. Even the most highly productive pork producers could end up handling more dollars, but pocketing fewer of them.

February 2023’s inflation rate, as measured by the year-over-year change in the consumer price index, was 6.0%. It slowed a tad from January’s 6.4%. While down from the June 2022 peak of 9.1%, inflation is still well above the Federal Reserve’s 2% target rate.

Rates dampen growth

The Fed has been hiking interest rates to ease inflation. The Seventh Federal Reserve District is made up of Iowa and most of Illinois, Indiana, Michigan and Wisconsin. A survey of the district’s banks showed nominal interest rates on new farm operating loans averaged 7.50% as of Dec. 31, 2022. Farm real estate loans averaged 6.80%. These are the highest rates since the fourth quarter of 2007.

In March, the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri released its latest 10-year baseline update for U.S. agricultural markets. FAPRI forecasts suggest the prime rate will remain above the pre-pandemic level through 2032. The prime rate is generally the lowest rate of interest charged by a bank, with other variable rate loans (e.g., credit cards, lines of credit, variable rate mortgages, home equity loans, home equity lines of credit) calculated as a certain amount over prime.

As producers evaluate whether to invest, how much to invest and when to invest to expand production, they analyze the expected rate of return on the investment and the interest rate.

If pork producers think the rate of return on a project will be higher than the interest rate, they will carry out the project. Therefore, producers have more incentives to invest when interest rates are low. In contrast, higher interest rates boost investment costs, which deter investment. Less investment in production may tighten supply, therefore lifting prices and potentially hiking producer profits, but that takes time.

The Ag Economy Barometer is a collaboration between Purdue University’s Center for Commercial Agriculture and the CME Group to provide monthly nationwide measures of the health of the U.S. agricultural economy. Each month, agricultural producers are surveyed to get a feel for monthly economic sentiment.

Seventy-two percent of producers in the February 2023 Ag Economy Barometer survey said it is a “bad time” to make large investments in their farming operation. Just 15% reported it is a “good time” to make such investments.

Of the respondents who said it is a “bad time” to make large investments, 45% said it was because of the rise in prices for farm machinery and new construction, while 27% of respondents chose “rising interest rates” as a primary reason for it being a poor time for making large investments.

Hog cycle could stretch

Hog production and price cycles have existed ever since hogs became a major enterprise in U.S. agriculture. Hog cycles are recurring changes in production and/or prices. Cycles are typically several years in length.

A complete cycle includes successive years of increase and decrease in either hog production or prices extending from one peak to the next peak (or one trough to the next trough). This is in contrast to seasonal patterns, which are recurring production or price changes that take place within a year.

Hog production cycles exist because hog producers respond to changing economic conditions in the hog business. When hogs have been profitable for a while, producers begin to expand production to take advantage of the expected profit opportunity. Expansion typically continues until larger supplies cause prices to drop to unprofitable levels for most producers.

However, hog prices and profits are not the only hog production cycle drivers. Financial position matters. Sometimes producers see profits ahead and would like to expand, but they cannot until they shore up finances after a series of losses.

Changes in production costs also affect profitability and can contribute to cyclical production trends. Recent sharply higher interest rates boost cash needed to service debt, which may be deterring current expansion plans. Other outside forces heighten uncertainty, which may also dampen enthusiasm for expansion.





Source: agupdate.com
 

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