Kevin Grier, Senior Market Analyst, George Morris Centre

US Forecasts

The most recent US Hogs and Pigs Report was released at the end of September. That report contained the following important information regarding hog supplies and intentions:

• US inventory of all hogs and pigs on 1 September 2009 was 66.6 million head. This was down 2 per cent from 1 September 2008.
• Breeding inventory, at 5.87 million head, was down 3 per cent from last year.
• Market hog inventory, at 60.8 million head, was down 2 per cent from last year.
• The June-August 2009 pig crop, at 28.8 million head, was down 2 per cent from 2008.
• US hog producers intend to have 2.94 million sows farrow during the September-November 2009 quarter, down 3 per cent from the actual farrowings during the same period in 2008, and down 8 per cent from 2007. Intended farrowings for December 2009-February 2010, at 2.93 million sows, are down 3 per cent from 2009 and down 5 per cent from 2008.

This information is important due to the strong relationships that exist between the inventories and future slaughter. For example there is a very strong correlation between the pig crop and slaughter six months later. Market hog numbers also provide a good guide to slaughter in the coming two quarters. Farrowing intentions can be used to estimate slaughter two to three quarters further out.

As a starting point, a brief glance at the September Report suggests that US based slaughter is going to be down in 2010 compared to 2009. How much US based slaughter is going to decline will vary by quarter. The June-August 2009 pig crop indicates that US based slaughter will be down by just 2 per cent in the first quarter of 2010. The farrowing intentions the fourth quarter of 2009 and the first quarter of 2010 provide an argument that slaughter could decline by 3 per cent in the second and third quarters of 2010.

Beyond that relative certainty of the June-August pig crop, however, it is necessary to apply other insights such as breeding herd slaughter rates and producer margins. With regard to breeding herd cull rates, it is not yet apparent that the US industry is beginning to cull its sows at an accelerated rate. With that said, anecdotal insights indicate that the packer demand for culls is less than the supply of culls on offer by producers. In addition, there is some discussion among market watchers that there have been more once-bred gilts culled. If they are in good condition they will be marketed and recorded as slaughter hogs, not sows. In other words culling rates might be poised to increase. This of course is closely related to the ongoing producer losses in the United States. Iowa State University budget models show that US producers have been in a serious loss position for two years. These losses are now estimated to be greater than those experienced in 1998 and 1999.

Based on these factors, it is estimated that US - based slaughter in the second half of 2010 should decline by up to 4 per cent. That in combination with continued reductions in Canadian live shipments will mean that total 2010 slaughter should decline by 4 per cent. Slaughter in 2009 will total about 113.5 million head while 2010 slaughter should be about 109 million. Figure 1 shows actual slaughter for 2008 and the first three quarters of 2009. The fourth quarter of 2009 and 2010 are forecasts.

Figure 1 - Source: USDA National Agricultural Statistics Service and George Morris Centre estimates

2010 Demand

Demand can be broken down into two main variables: domestic and export. With regard to domestic demand, North American demand for pork has been stagnating or declining for the past five years. In the mid to late 2000’s North American demand for pork has weakened.

With regard to export demand, Figure 2 shows the value of US pork exports from 1999 through the estimated value for 2010.

Figure 2 – Source: USDA Foreign Agricultural Service

Exports in 2009 will decline by about 15 per cent from the extraordinary total in 2008. The decline is due to the slower global economy and the lingering effects of H1N1. Despite that decline, as can be seen, exports in 2009 were right on the longer term upward trend line.

Looking forward the domestic and export demand for pork in 2010 will be largely dependent upon global macroeconomic conditions. The impact of H1N1 remains uncertain and a negative on overall prospects. The North American and domestic economies are in a very slow recovery from a very deep recession. While economic conditions are expected to improve, the rate of improvement will be slow and from a very low level. On the positive side, however, China and the US seem to be making progress towards normalizing pork trading relations. In addition, the US dollar depreciation is likely to help US exports in 2010. Domestically, it is noted that wholesale pork demand has been really weak post- H1N1. There could be some snap back in market conditions if domestic demand returns to more historically normal levels.

Generally speaking with regard to demand, conditions should be considered to be similar to 2009 at the worst. More likely, however, domestic and export demand conditions should be better than 2009.

2010 US Hog Prices

Based on the supply and demand forecasts, the following are the quarterly US carcass based price forecasts for 2010:

Canadian and Alberta Developments

The StatsCan hog inventory reports were released at the end of October. Figure 3 shows the trend in the sow herd on the prairies from 1995 through the third quarter of 2009.

Figure 3 – Source: Statistics Canada

The Prairie sow herd declined by 7 per cent in the third quarter of 2009 compared to the third quarter of 2008. That follows a 7 per cent decline in the second quarter and a 9 per cent decline in the first on a year over year basis. The Prairie herd has declined by 18 per cent from the third quarter of 2005. Alberta’s sow herd has declined by 7 per cent on a year over year basis and by 22 per cent from 2005. The 2005 year is a good year to compare since it was the peak of the Canadian herd.

Alberta’s slaughter rates have been trending higher in recent months but that is a fairly normal seasonal occurrence. Figure 4 shows weekly slaughter in Alberta and Manitoba from 2008 through the end of October. As can be seen, Alberta’s slaughter was running near the 60,000 head per week mark during October. That overall slaughter rate is not unusual for that time of year. Olymel Red Deer has been putting in solid weeks of 45,000 head. The other interesting point of the graph is the steady increase in slaughter in Manitoba. This slaughter has routinely settled around the 110,000 head range. Numbers like these suggest that Brandon must be doing around 90,000 head per week.

Figure 4 – Source: Agriculture and Agri-Food Canada Red Meat Section

Alberta Price Forecasts

In addition to forecasting the US price, the exchange rate must also be forecasted. Needless to say, there are varying forecasts by the major banks on the Canadian dollar’s performance in 2010 and 2011. TD Bank Financial Group’ Quarterly Economic Forecast from September 2009 sees a par exchange rate in the first quarter of 2010. It also forecasts a gradual quarter-by-quarter depreciation from that point. They expect the exchange rate to be US¢/C$0.93 by the end of 2010 and 0.89 by the end of 2011. The Bank of Montreal’s BMO Capital Markets Economics, October 23 sees a gradual appreciation from 0.99 in the first quarter of 2010 to 1.02 in the last quarter of 2011. The Scotiabank Group Global Economic Research is closer to the BMO in seeing a par currency in the future. As of the end of October, Canadian dollar futures were trading around 0.93 through 2010.

For the purposes of this forecast, a US¢/C$ exchange rate of 0.95 will be used. Based on the exchange rate forecast of 0.95 as well as the US forecasts above for 2010, the following table shows expected Alberta index 100 prices through the third quarter of 2010.