Inflation has increased the cost of everything over the past 12 months. First described by many economists as transitory, the reality of higher prices and decreased purchasing power of the dollar has persisted. Even as pork production dramatically increased over the past year, higher hog prices have provided good margins for producers.
Increased Cost of Production
Production costs of market hogs have risen dramatically, led by feed cost increases. The U.S. economy is driven largely by energy costs at its core. With higher energy costs rising for the past year, the impact to crop production has been enormous. Energy impacts on fertilizer costs and transportation costs are driving feed costs to record levels for producers.
The increased costs of producing pigs don’t stop there. In addition to feed costs, higher costs in labor, utilities, maintenance, repair, trucking and just about every input cost means the cost of production will reach record levels today. If commodity prices stay near today’s level – i.e. $7.00 corn, $475 soymeal, and $4.75 diesel fuel – I expect that breakeven cost of production will top out at $190 – 200 per head ($90 to $95 per carcass cwt).
This level of production costs causes the industry to pause and determine the impact of supply and demand at levels it requires to maintain a reasonable profit margin over time. As a leading economist mentioned this week, it certainly takes the bloom off of $100 futures. That is well said and makes us think about the ability to sustain margins if costs don’t pull back over the next year.
Domestic demand has continued to be very strong for pork and supportive of higher prices today. Retail scanner data collected nationwide on pork products continues higher. Pork prices in February were up 15% over the prior year. Retail beef prices were up 19% and composite broiler prices were up 14%.
The demand indexes for pork, beef and chicken were much higher than year ago levels and obviously contributing to food inflation. The reduction in pork supply, from reduced sow numbers during 2020 and continued herd health challenges is also supporting pork prices. Pork production in the quarter ending in February was down over 400 million pounds (5.5%), according to USDA reports.
Inflation has reached levels not seen since the for over 40 years and is affecting about every cost associated with pork production. To date, revenue has helped buffer the impact on our industry as meat prices continue to climb. This is the opportunity to make sure you have budgets in place to understand your farm costs and be in a position to lay off risk when it makes sense.