Alberta Hog Market Commentary and Outlook - Fall 2005

By Kevin Grier, Senior Market Analyst, George Morris Centre, in Guelph and Calgary. Published by Alberta Pork. This is the latest Alberta Hog Market Commentary and Outlook which discusses the USDA's Hogs and Pigs report and Bird Flu's effect on pork prices.
calendar icon 5 December 2005
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Alberta Pork

U.S. Market Outlook

The September United States Department of Agriculture (USDA) Hogs and Pigs Report contained no surprises, which was very surprising. Pre-report expectations were for very modest growth, and that, in fact is what the actual report indicated. The U.S. inventory of all hogs and pigs on September 1, 2005 was 61.5 million head. This was up slightly from September 1, 2004, and up one percent from June 1, 2005. Breeding inventory, at 5.97 million head, was up less than one percent from last year, but down less than one percent from last quarter.

That modest expansion is, of course, the surprising part. Given the fact that as of September, the U.S. hog production sector had enjoyed nearly 20 months of profitability, some were naturally expecting a little more of an aggressive expansion. With that noted, however, the important question is what it means for slaughter and production in the coming quarters. The bottom line is that it appears that 2006 U.S. slaughter is going to be about one percent greater than 2005. That makes 2006 another record year for U.S. slaughter and production, and it continues a string of six straight years of increased slaughter. See Figure 1.


So if the supply situation for 2006 is now at least relatively clear, the question turns to the other part of the pricing equation – demand. In my estimation, U.S. demand for pork has been strong, but not exceptional. Figure 2 shows one way to illustrate pork demand. The graph takes the U.S. consumer price index for pork and multiplies that by the USDA’s estimate of pork consumption and then indexes the data so that the first quarter of 2002 is the base = 1.

Figure 2 shows that since 2001, U.S. pork demand has been gradually increasing. This gradual increase in pork demand is part of the reason why the industry has been able to support ever-increasing pork supplies. The other component of demand, of course, is export demand. In that regard, Figure 3 shows the performance of U.S. pork exports over the past three years.


On a dollar basis, U.S. pork exports year-to-date through August were up 32 percent while on a volume basis, the exports increased by 29 percent. High-profile international drivers, such as the refusal of the Japanese to take North American beef, Avian Influenza in southeast Asia and Foot-and-Mouth Disease (FMD) in South America, have all had a positive impact on North American pork exports.

Clearly, both export and North American demand have been the reasons why the industry is able to support annual increases in pork production without material decreases in prices. I noted in my last quarterly report to Alberta Pork members that demand is keeping prices much higher than would have been expected in the past, given the volume of production.


I noted that price levels in 2004 were more than 40 percent higher than would have been expected with similar supply levels during the 2000 through 2003 period. During the first three quarters of 2005, prices were 35 percent, 25 percent and 19 percent higher than would have been the case in those quarters from 2000-2003. As such, it is easy to understand just how important demand is for price support. Conversely, any negative changes in demand will be the reason why prices come under pressure. In that regard, John Lawrence, professor at Iowa State University offers the following comments regarding demand risks1:

“Domestic demand for beef and pork has been strong and growing in recent years. However, increased energy costs are expected to impact consumer spending, particularly as the winter progresses and the heating bills arrive. Another risk to beef and pork prices is Avian Influenza also called the “bird flu.” People cannot get bird flu by eating poultry products, but if customers, particularly export customers, of U.S. poultry switch away from poultry it will back poultry up into the U.S. market making it cheaper. We saw a sample of this in 2002 when Russia blocked U.S. broiler imports and chicken prices in U.S. grocery stores dropped dramatically, pressuring beef and pork prices.”
1:http://www.econ.iastate.edu/outreach/agricult ure/periodicals/ifo/IFO_2005/ifo103105.pdf

Prairie Initiatives

The past quarter has seen the continuation of relatively good margins and good news for hog producers. From the beginning of 2003 through the third quarter of 2005, Alberta hog producers have been in the black for nine out of the thirteen quarters. Furthermore, while energy costs are a big factor this winter, the fact is that the biggest cost component - feed - is going to be abundant and comparatively inexpensive for Alberta producers. Figure 4 shows estimated gross and net margins. From 2002 onward, the data was supplied by Bert Dening of Alberta Agriculture’s Barrhead office.

Meanwhile, during the last quarter, things got interesting on the hog-packing front. In early October, Winnipeg Free Press ran a story regarding the possibility that Olymel will be building a new hog kill plant in Winnipeg. As of early November, the company has neither confirmed nor denied anything about the plant. While the article was short on hard facts, The Free Press offered readers an assurance from a University of Manitoba professor that Olymel is “not a fly-by-night company.” Other than the fact that Olymel is not a fly-by-night company, nothing else is certain. That, of course, did not stop further speculation in the article that the $130 million plant will be killing, sometime, around two million head per year. The article also quoted the requisite hand-wringer, who is concerned about the plant that may or may not be built. Fred Tait, a member of Hogwatch Manitoba, said the smell of hog excrement could be a concern for people living close by. He added that another processing plant could encourage more large hog barns to be built. His group is concerned about the impact such operations have on the environment.

Actually, if The Free Press really wanted to get a quote from someone who is concerned about the plant, they should have called Maple Leaf. If this plant is going to be a reality, it is going to tighten up the supply-demand balance on the prairies. This year, an average of 26,000 slaughter barrows and gilts left the eastern prairies each week for slaughter in the U.S. Corn Belt. If the plant is going to be a two million per week plant as suggested in the article that means it would be killing about 40,000 per week. With that said, that two million estimate was likely based on a 20,000 head single shift plant. Assuming it takes the usual length of time to get a double shift going, meaning about 100 years, then the plant in theory could reasonably be accommodated. That does not even consider that some of the 75,000 western feeders would likely stay for finishing if there was a new plant.

Nevertheless, there will still be plenty of those slaughter barrows and gilts heading south, even with a new plant. Southeast Manitoba is Morrell country. Southeast Manitoba producers appreciate the pricing offered out of Sioux Falls. The bottom line is that the new plant will almost definitely result in tighter basis and price spreads on the prairies. If Maple Leaf Brandon is finding it tough now with its current low hog costs, then it is going to be much worse with a tighter basis. At the very least, if there is going to be a new plant, it is going to make things very interesting for Maple Leaf.

Then again, it is best not to get too excited about the prospect of a new plant. Over the last few years, it seems that packers derive some pleasure talking to various governments and reporters about new plants, thereby generating a pile of useless press clippings. The contrast with the U.S. is dramatic. If Smithfield, Hormel or Triumph say they’re going to build a plant or expand capacity by a certain amount, it will happen, and will usually be done within a month or so of what they originally said (barring perhaps a careless former welder or two). Or as is currently the case, if they say they are going to close a plant and streamline operations, it will all happen within a day or two of what they originally said. Further to that point, a friend of mine in the U.S. sent me a note recently saying that “the first day a Canadian plant goes a full second shift, let me know and I’ll send you a bottle of good whiskey, providing we’re both still alive.”

Price Forecasts

Once again, any forecast of price becomes an exercise in trying to anticipate what could go wrong on both the domestic and export demand side of the equation. The following table shows my price forecasts for the U.S. National Base Lean carcass basis and the Alberta Index 100 price level. The Alberta forecasts are based on an 85-cent dollar during the first half of 2006 and an 86-cent dollar in the second half. The Alberta forecasts are also based on current formulas being offered in the province.


Source: Alberta Pork Market Review - Fall 2005
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