(AgricultureOnline) The marketplace called for a sharp cut in the U.S. hog herd, and the industry responded last year. That's reason for optimism that the bleeding hog industry should heal and return to higher prices for farmers in 2010.

"Thank goodness hog producers have put 2008 and 2009 behind them. They lost about $20 per hog produced, which totaled nearly $5 billion in the two years. For them, 2010 represents more than just a New Year, it brings improving prospects for business survival...a breath of fresh air in a financially drowning industry," says Purdue University Extension economist Chris Hurt. "The improving prospects are a result of both reductions in U.S. pork supplies and improving demand."

Though it didn't happen as quickly and deeply as some thought was needed at first, herd liquidation was the key feature of the hog business in 2009. Hurt says the cutbacks could stir big demographic changes in the industry overall.

"In the 1990s and early in the 2000s, hog production tended to grow in areas away from the traditional corn/hog belt," he says. "There is some indication that the pork industry is consolidating back to the Midwest."

Cutback numbers

That consolidation comes as the following cutbacks were made in 2008 and 2009 (shown in numbers and % decrease):

North Carolina: 90,000 head (9%)
Texas: 45,000 head (43%)
Utah: 25,000 head (25%)
Arkansas: 20,000 (24%)

"California, a relatively small production state, experienced a 65% reduction in the size of the breeding herd in the past 2 years," Hurt adds.

But, the slash in the number of animals in the breeding herd alone hasn't cut supplies. In fact, productivity gains have bucked the expected trend.

"While the breeding herd has been down 6% over the past 2 years, pork production has actually increased due to a four percent increase in the number of pigs per litter and to heavier market weights," Hurt says. "This has been the dilemma as reductions in the breeding herd were more than matched by productivity increases."

Despite these productivity gains, prices for farmers ought to pick up through the next year, Hurt adds, largely because of tightening consumer demand.

"Domestic consumers will notice much tighter pork supplies in 2010. Pork production in 2010 is expected to be down 2% to 3%, but, domestic availability on a per capita basis will drop by nearly 6%," he says. "In addition to smaller U.S. production, pork exports are expected to rise 10% and U.S. population will grow nearly 1%."

What it means on the farm

What about production costs and resulting breakevens? Hurt expects production costs to hover around the $50 level, and that will continue to challenge farmers. But, the erosion of profits from the last 2 years will likely ease.

"First-quarter live prices are expected to average in the higher $40s per hundredweight. The highest prices of the year will likely occur in the second quarter and average in the low $50s. The third quarter is expected to have average prices near $50 and the final quarter in the mid-to-higher $40s. For the year, expect live hog prices to average near $50, or about $67 on a carcass basis," Hurt says. "Unfortunately, total costs of production are also expected to be near $50 to $51 for the year based on corn and meal prices on January 4, 2010.

"The good news is that costs of production include all costs including full labor return and full depreciation of buildings and equipment. The bottom line is that hog producers are not expected to go backwards financially in 2010," he adds.

Volatility will continue among the different pork sectors. That's not all negative, however.

"The lean hog futures market is somewhat more optimistic than these forecasts. In addition, when hog prices do turn higher after a slump, they historically have greatly exceeded expectations," Hurt says. "But vulnerabilities exist as well, in the form of uncertainties over the level of feed costs; over the strength of the economic recovery; and over trade disputes that could still stifle the anticipated pork export growth."

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