018-Lancaster Farming Saturday, October 11,1986
By Richard Barczewski
University of Delaware
NEWARK, Del. - Hog prices
are up and things look bright for
the industry. I recently had the
opportunity to thumb through
some market reports in a local
farm newspaper and found hog
prices as high as $69.25 per hun
dredweight. That’s enough to put a
smile on any hog producer’s face,
but how long will it last?
Market hog prices depend on two
key factors, supply and demand.
Whenever the demand for hogs
exceeds the supply available,
prices will rise. This increase will
continue until it reaches the point
where demand decreases.
Why would demand decrease?
Usually the consumers eventually
refuse to pay the costs reflective of
the market price. As you are well
aware, pork prices have increased
at the meat counter of your local
supermarkets.
If hog supplies remain constant,
and consumers start refusing to
buy pork in the supermarkets,
demand for hogs will decrease and
so will prices until both supply and
demand stabilize.
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Plan Now For Lower Hog Prices
As many of you are aware, this is
not what usually happens. When
prices rise to the level that they are
now, producers begin the all too
familiar expansion of their herds,?
which ultimately gluts the market.
In turn, the market price plum
mets and profitability is reduced.
Now I’d be a fool to suggest that
you not expand your herds.
Everybody knows that if sow and
gilt numbers remained constant,
prices would remain high as long
as the demand didn’t decrease.
However, with high hog prices,
people want to make more. Once a
producer starts expanding,
everybody else gets into the act.
And before you know it, prices
decrease.
The point I’m trying to make is
that high market hog prices won’t
last forever. Many of the factors
that dictate supply and demand
will eventually change and reduce
the market price.
The key to profitability is to be
aware of your operating costs and
make sure you’re doing an ef
ficient job of producing market
hogs.
It’s easy to forget about your
%
production costs and “efficiency”
when you’re making money.
Remember, however, that while
everybody is making money in the
hog business, some producers are
doing a better job. A producer who
is making a profit on a $4O market,
is obviously doing quite well on a
$6O market.
One problem that we need to
address is how we handle the in
creased income from an up
market.
We all know that prices will
eventually go back down.
Currently, futures prices contracts
for July, 1987 are at $47. But where
the cash market will be at that
time is hard to pinpoint.
An option you need to consider in
your operation is whether or not to
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buy into futures contracts. Doing
so can look you into a profit that
may not be there next July on the
cash markets. Then again, maybe
the cash markets in July will be
$5O, and you’ll be on the short end
of the stick. Futures can remove
some of the uncertainty of the cash
markets, but as you can see above,
they don’t remove all of the risk.
Another possible option is to sell
on the cash markets, but plan
ahead and save some money when
the markets are high to get you
enough periods of low market
prices.
One unfortunate occurrence is
that as prices increase, we
automatically think of all the
extras that we need. Sometimes
this can get a little dangerous when
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a market is volatile. We quickly
forget about the $4O market and for
some strange reason think that
market hogs will sell for $6O for the
rest of our lives. A rude awakening
will occur when the cash market
crashes.
The key thing to remember is
that efficient economical
management is always important
in the hog business.
Always shop for your best
market. Prices vary from one
market to the next, so make sure
you’re selling at the best possible
place. Consider futures contracts
as an option.
Secondly, keep up on feed and
supply costs. Buy wherever you
can get the best deal on supplies,
feed and equipment. Don’t let high
markets entice you into buying
new equipment that you don’t
really need.
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