When pigs fly

A look at the soaring costs of hog production.

by Steve R. Meyer, Ph.D.

Inflation is everyone’s favourite boogeyman at present. It is being blamed for everything from economic hardship to marital difficulties to childbirth pain. Okay, maybe not the last two but you get my gist.

Hog production costs have exploded in the past two years, and many people point to inflation as the reason. It certainly does deserve some of the blame, but far from all of it. Let’s explore.

Inflation is defined as a systematic increase in the general price level. It is a measure of Prices with a capital P, not the price of an individual item. Conversely, inflation measures the decline in the value of the currency in question. The US dollar in February bought about six percent less of the goods/services in the US economy than it did one year ago. That doesn’t mean it bought six percent less of every item, just six percent less than the aggregate of all goods and services.

The inflation rate has been in the low six percent range for the past two months. Hog production costs, as estimated by Iowa State University, were 13.1 percent higher in February versus one year ago. Clearly, inflation (a loss in the value of the dollar versus all goods and services in the economy) is not THE driver. Something else is going on to push hog costs up by over twice the rate of general inflation.

chart break even costs - farr-finish operations

There are two main factors–the market for corn, and the market for soybean meal. Both supply and demand have pushed both of those higher and the demand factors are not likely to go away.

This is especially true for US soybeans, where tax credits for renewable diesel have driven the demand for soybean oil sharply higher. That value had pushed soybean prices higher and forced corn prices to rise to guarantee enough acres get planted to meet end-user needs.

These forces in the US have been made even more critical by a historic drought in Argentina, the world’s largest exporter of soybean meal. The impact on the soybean meal market has been profound. I fully expected meal to be pressured by now by larger supplies, however the world market has kept meal prices much higher than I and many others had expected. New involvement by long commodity funds in soybean meal has supported futures prices as well.

Higher prices of pharmaceuticals, energy, building materials, labour, and now interest rates have added to the upward pressure and caused a veritable perfect storm for hog production costs.

But the cure for high prices is high prices as long as the marketplace is allowed to work! New construction and expansions are poised to add roughly 20 percent to US soybean crushing capacity. A small portion of that will come online this year but the lion’s share is scheduled for 2024 and 2025.

These expansions are driven by the need for soybean oil as a renewable diesel feedstock and will result in a much larger supply of soybean meal. That supply will push soybean meal prices lower.

More corn acres are forecast for 2023 so a good growing season should result in more corn supply and lower prices there as well. A shift from La Nina to El Nino conditions in the southern Pacific Ocean bodes well for growing conditions in primary growing areas.

But do not expect costs to go back to the “good old days” of pre-renewable diesel.

That new use of soy oil is here to stay, and will likely grow. Sustainable aviation fuel is just getting started and will create new demand for both soy oil and ethanol as both can serve as feedstocks.

I don’t expect today’s forecast break-even for average producers of nearly $1.00 per pound of carcass weight to last long, but neither do I expect a return to the $70s and maybe not to the $80s any time soon.

Steve R. Meyer, Ph.D.

Dr. Meyer joined Partners for Production Agriculture in January 2018. In his role, he speaks on various industry topics, develops and delivers economic data and analyses, and works with clients to provide critical perspectives.