Hog producers indicated intentions to begin rebuilding breeding herds, according to USDA's June hogs and pigs report. But before expansion takes hold, pork production will decline 2% in second-half 2000 from a year earlier. With lower pork production in the near term and prospects for only modest expansion next year, hog prices are expected up from last year's $34 per cwt to average in the mid-$40's in 2000 and 2001.

After signaling a 2% decline for June-August compared with a year ago, producers have reversed direction and are planning to have 1% more sows farrow in September-November than a year ago.

The report says hog producers' returns moved well above the economic breakeven point (receipts less costs) in first-half of this year as prices rallied into the low $50's per cwt and feed costs remained the lowest in several years. Producers have been reducing herds due to poor returns in late 1998 and 1999. The June 1 inventory of all hogs and pigs totaled 59.4 million head, and the 6.23 million breeding hogs in that total was a 4% decline from last year.

Additional farrowings, along with a rising number of pigs per litter, would increase the pig crop 1-2% for September-February over the same period a year earlier. Pork production, in turn, is forecast up about 1% for calendar 2001 with the first quarterly year-over-year increase in March-May 2001 since third-quarter 1999.

But before expansion takes hold, says USDA, pork production will decline 2% in second-half 2000 from a year earlier, based on a 4% decline in hog slaughter and a continued increase in average dressed weight. The forecast slaughter decline results from a 2% smaller pig crop for December 1999-May 2000 compared with a year earlier and slightly higher gilt retention for the breeding herd.

Farrowings during the period were down from a year earlier, but pigs per litter were up. The move in the industry to larger specialized operations has been partly responsible for the larger litters, this report says. For example, farms with 5,000 or more hogs averaged nine pigs per litter in March-May 2000, compared with 7.8 for farms with 1-99 head..

Spring's seasonal decline in slaughter rates, the public's taste for bacon, and the rising price of beef ratcheted up hog prices into the low $50's per cwt in late spring and early summer this year. Demand for bacon continued strong, especially for fast-food industry use in sandwiches. As beef prices increased, food retailers featured the more price-attractive pork loins, strengthening loin prices.

With lower pork production in the near term, prospects for only modest expansion next year, and ongoing healthy retail demand, the hog market promises to be relatively strong into 2001. While there is some uncertainty about whether this year's strong demand will persist, hog prices are expected to average in the mid-$40s per cwt in 2000.

In late fall 2000, when slaughter reaches a seasonal peak, hog prices could average around $40 per cwt. Given expected expansion in production in 2001, slaughter capacity could be strained late in the year, putting downward pressure on hog prices. Hog prices are expected to average $42-46 per cwt in 2001.

Retail price increases usually lag behind increases in farm prices; with rising hog prices in first-half 2000, the farm-to-retail price spread can be expected to narrow, then widen. By second-quarter 2000, the price spread had shrunk to $1.68 per pound after averaging $1.81 in 1998 and 1999.

Following the two-year price decline, tighter pork supplies will probably push retail pork prices up 5-6% this year. In 2001, retail prices may increase about 1%, widening the spread again. Producers likely will stay in a mood to expand, with hog prices much higher than a few years ago and lower feed prices anticipated over the next 18 months (record corn and soybean crops are projected for 2000).

As producers rebuild their equity positions and as large facilities take extra time to get up to speed, however, growth will probably be gradual, according to the report.