Seasonally, hog prices tend to strengthen from March-April to their late spring early summer price peak. However, given the extraordinary price strength we've witnessed this winter, odds favor a smaller than normal increase in hog prices from March to June, unless foot and mouth disease problems in the European Union (EU) reduce U.S. pork imports and stimulate U.S. pork exports. And, although it's very unusual for prices in summer to fall below those in late winter, it could happen this year when hog slaughter supplies increase this summer.

Hog Slaughter and Pork Production Below A Year Ago
Federally inspected hog slaughter this winter has fallen 2.1% below a year ago, which is about on-track with forecasts based upon the December Hogs and Pigs report. Weights have been about 1% heavier than a year ago and, as a result, pork production has fallen below a year ago by less than 1%.

February Hogs and Pigs Report
The second monthly Hogs and Pigs report was released Friday, February 23, 2001 and the news it contained was much less positive than that published in the January report. Sow farrowings during January 2001 were up 4% compared to January 2000. That was on track with the farrowing intentions reported in December's quarterly Hogs and Pigs report, but was disappointingly large given that the previous monthly report suggested actual farrowings would fall short of intentions. However, assuming farrowings reported for December and January based upon the small monthly survey are a good indication of actual farrowings throughout the industry, February farrowings need to increase 6% for December-February farrowings to meet the farrowing intentions reported back in December. If that occurs it would be an indication that the actual increase in March-May farrowings, which provide the bulk of the fall quarter's slaughter, will be significantly larger than the 1% increase in intended farrowings reported back in December.

Besides the increase in farrowings, the February Hogs and Pigs report also indicated productivity is increasing even faster than had been the case as pigs per litter increased 2.1% during January 2001 compared to January 2000. This was a significant departure compared to the previous month when pigs per litter increased 1.4%, and the last half of 2000 when pig per litter increases averaged 1% compared to 1999. It remains to be seen whether the reported productivity increase during January was an aberration or truly an indication that productivity is increasing more rapidly than in the past.

Foot and Mouth Disease Impact
Foot and Mouth Disease (FMD) has been confirmed in the United Kingdom (UK) leading to quarantines and restrictions on travel and livestock trade within the European Union, in an attempt to halt the disease's spread. To date, meat exports from EU countries other than the UK have not come to a halt because of FMD. However, the FMD outbreak has generated speculation that the U.S. will benefit if EU pork exports are hampered by FMD.

A halt in pork exports from the EU could benefit the U.S. in two ways. First, EU countries, primarily Denmark, provide the U.S. with pork. U.S. pork imports from EU countries, on an annual basis, total about 1% of U.S. pork production. If pork exports from the EU are temporarily halted the import reduction will, effectively, reduce pork supplies. Second, the EU is a large pork exporter to other countries. Consequently, a halt in pork exports from the EU could, in the short run, also stimulate demand for U.S. pork exports to replace lost pork exports from the EU. All of this would help boost U.S. pork and hog prices and it could occur during a time frame when U.S. are poised to increase seasonally. Unfortunately, it's virtually impossible to quantify the impact of FMD on U.S. pork trade until more is known about the severity of the outbreak and how long it might take to bring it under control.

If FMD does provide a boost to U.S. pork exports, it will be welcome. Although total U.S. pork exports during 2000 were up about 2% compared to the previous year, all of the increase occurred during the first three quarters of the year. Total pork exports during fall 2000 were actually 13% smaller than during fall 1999. Big declines in pork exports to Russia (-85%), S. Korea (-27%), Hong Kong (-28%) and the Caribbean (-26%) were primarily responsible for the decline in fall quarter total pork exports. The huge decline in exports to Russia occurred because of the absence of a food assistance package in 2001 compared to 2000. If Russia is excluded from the totals for both years, fall quarter 2000 exports were actually 14% larger than in 1999. Rapid export growth to our three largest customers, Japan (+9.5%), Canada (+15%) and Mexico (+73%) were the bright spots in last fall's pork export picture.

Finally, it should be noted the most recent experience with an FMD outbreak's impact on U.S. pork exports was disappointing. For example, in March 1997 FMD in Taiwan led to a suspension in pork exports from Taiwan to Japan. Following Taiwan's FMD announcement most analysts expected the U.S. to benefit from a large increase in pork exports to Japan since Taiwan was one of Japan's principal pork suppliers, providing about 45% of Japan's total pork imports. Subsequently, it became apparent that the big increase in U.S. pork exports was not going to materialize. In fact, U.S. pork exports to Japan from April-December 1997 were actually 2% smaller than during April-December 1996, in part because Japanese consumers opted to reduce their pork consumption.

Strong Wholesale Pork Values Push Hog Prices Higher
Across the board strength in wholesale pork prices has pushed the pork cutout value, and live hog prices, higher. Since mid-February USDA's estimated pork cutout value increased 14%. At the same time loin prices rose 19% and ham prices increased 27%. Pork belly's have played a much more modest role in the recent run-up, increasing just 2 to 3% over the last several weeks. The increase in wholesale pork values has been surprising given the modest decline in pork supplies, but could indicate that retailers and consumers are becoming more interested in pork features, given the strength in beef prices this winter.

Hog Price Outlook
Over the next several months, strong pork prices will support live hog prices above levels forecast following the December Hogs and Pigs report. In fact, Iowa-S. Minnesota live hog prices during the 2001's first quarter could easily exceed last year's $41 average by $1.00 per cwt. An April-June quarter average in the upper $40's now seems likely and, at times, cash prices this spring are likely to be above $50 per cwt. If summer quarter supplies increase as expected, based upon a larger winter pig crop, odds favor hog prices declining counter-seasonally this summer, but still averaging above $40 per cwt.

Finally, the outlook for late 2001 and 2002 will depend on how hog producers respond to this year's improvement in profitability. A significant increase in spring farrowings, combined with increases in productivity, would still produce a large increase in hog slaughter and pork production this fall, leading to a fall quarter price average in the low $30's. And if profitability this year winds up encouraging even modest breeding herd expansion, hog slaughter supplies during fall 2002 will again strain pork processing capacity and push live hog prices into the $20's.