High Corn Prices Used to Bring Higher Hog Prices

With globalization, high corn prices may stimulate more pork export competition.

Published on: Dec 12, 2006

Corn prices nearly double year-ago levels have people pondering what the fast-growing ethanol industry means for U.S. pork producers.

Ron Plain, University of Missouri economist, offers a simple answer. "Unless crude oil prices plummet, which is certainly possible, or the federal government eliminates its 51-cent per gallon subsidy for blending ethanol with gasoline, which is unlikely, corn prices will be much, much higher than in the past."

Economists at Iowa State University estimate the equilibrium price for corn is $4.05 per bushel when crude oil is $60 per barrel. The U.S. corn price for the last seven years averaged only $2.10 per bushel.

What will $4 corn mean for hog producers? "Assuming protein prices rise only modestly, breakeven prices for slaughter hogs should run about $52 per cwt. live or $70 per cwt. of carcass," calculates Plain.

What does it take for carcass hog prices to average $70 per cwt.? In 2004 Iowa-Minnesota prices averaged $70.04 per cwt. with a hog slaughter that was only 1.2% lower than what is expected for this year.

"Although it would be painful, a 1.2% cut in hog production is certainly doable," says Plain.

A tougher question exists. That is what will $4 corn do to U.S. farm exports? Last year, the U.S. exported 12.9% of the pork we produced. Low cost corn has helped make U.S. pork producers very competitive. Will we still be able to export 13% of our pork production if corn prices stabilize at $4 per bushel?

"The answer depends on how other countries react to $4 corn," says Plain. "The U.S. accounts for nearly 40% of world corn production and two-thirds of corn exports. Our price is the world price. Doubling the price of corn will entice more acres into corn, both here and abroad.

Plain expects all the production from expanded U.S. corn acreage to go into ethanol plants. But, what of the rest of the world? He thinks some countries will likely follow our lead and expand ethanol production.

Other corn growers have options. "Corn producing countries that don't follow our lead will have the option of exporting the extra corn they produce at a $4 price or using it to expand their livestock industry and export the extra meat," says Plain. "The latter choice would mean trouble for U.S. hog producers.

A country like Argentina could quite possibly build a large hog and poultry industry on $3.80 corn (U.S. price less transportation cost) and undercut the United States as the supplier of choice for meat," he says.