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US Pork Outlook - October 2010

by 5m Editor
21 October 2010, at 12:00am

Producers have indicated their intention to farrow more sows in the first quarter of 2011 than for two-and-a half-years but tight corn supplies make this decision uncertain, according to Rachel J. Johnson in the latest Livestock, Dairy, and Poultry Outlook from the USDA's Economic Research Service.

Summary

The Quarterly Hogs and Pigs report, released on 24 September, showed producers' first farrowing intentions for the first quarter of 2011 year-over-year higher for the first time in 10 quarters. Higher first intentions by hog producers perhaps signal the beginning of industry expansion. However, the October World Agricultural Supply and Demand Estimates report showing lower corn production and lower year-end carry-out stocks injects significant uncertainty into hog producers' decision-making with respect to expansion. In the short term, lower production and stable demand are expected to result in fourth-quarter hog prices of $53 to $55 per hundredweight (cwt). Pork production in 2011 is expected to be year-over-year higher by 1.5 per cent, with hog prices lower for the year. August exports were year-over-year lower, while both imports of pork and live swine were above August 2009 totals.

Quarterly Hogs and Pigs Suggests Producers Intend Larger Farrowing in 2011 but Crop Production Creates Uncertainty

The Quarterly Hogs and Pigs report released by USDA on 24 September showed that hog producers' first set of farrowing intentions for the winter quarter of 2011 are year-over-year higher for the first time in 10 quarters. The report indicated that producers intend to farrow 0.5 per cent more sows than they did in this year's December-February quarter. If producers follow through on their 1 September intentions, it will represent the first year-over-year farrowing increase since the spring quarter of 2008, shortly after the US hog sector's returns turned sharply negative, and may signal an industry turnaround from a liquidation stance to an expansionary one.

USDA's release of its Crop Production report and the World Agricultural Supply and Demand Estimates (WASDE) on 8 October, showing lower-than-expected corn production and lower year-end carry-out stocks in particular, creates significant uncertainty for the US pork industry in moving forward. However, calculating hog producer returns, using October WASDE prices for corn, 48 per cent soybean meal and hogs, continues to show positive returns to hog production for the fourth quarter of 2010 and for 2011. But in a feed-cost environment where continued upside price risk is likely, following a period of more than two years of negative returns, the management skills of hog producers will be severely challenged in 2011.

Of course, hog producers do not operate in a vacuum, with higher production costs affecting them alone. Producers are the first link in a coordinated North American pork supply chain. Thus, higher costs of producing hogs will, in time, likely squeeze the margins of pork processors, wholesalers and retailers, as pork producers adjust to higher feed prices. The feed cost increase will be distributed and shifted through the supply chain, with higher retail pork prices the likely eventual outcome for consumers.

Incorporating the Quarterly Hogs and Pigs report's inventory and farrowing revisions, together with the lower-than-expected litter rate reported for the 2010 summer quarter, implies a fourth-quarter 2010 commercial pork production volume of 5.9 billion pounds, 2.4 per cent below a year earlier, and 2011 production of 22.5 billion pounds, 1.5 per cent above 2010. The forecast for increased pork production next year is based on expectations of a small year-over-year increase in farrowings and litter rates and minimal increases in average dressed weights due to elevated feed costs. Year-over-year larger production in 2011 would mark the first year since 2008 in which production increased over the previous year.

Third-quarter prices for live equivalent 51-52 per cent lean hogs averaged $60.13 per cwt, a 54.6 per cent increase over last year's third-quarter prices. Clearly, 5.5 per cent year-over-year lower pork production in the third quarter accounts for much of the price increase but largely stable domestic pork demand, together with spot 'shortages' in some wholesale markets for some pork cuts also contributed to very strong third-quarter hog prices.

For the fourth quarter, hog prices are expected to be $53 to $55 per cwt, more than 31 per cent greater than the same period last year, as pork supplies achieve their annual highs, with stable demand (domestic and foreign) anticipated. In 2011, hog prices are expected to average $54 to $59. Only first-quarter prices, anticipated at $54 to $58 per cwt, are expected to be above the same period of 2010.

August Trade Numbers Show Pork Exports Weaker and Imports Stronger Than Expected

US pork exports in August were 302 million pounds, 0.75 per cent below August 2010. For the January-August period, US companies have shipped 2.8 billion pounds of pork to foreign destinations, almost five per cent more than over the same eight- month period of last year. The small year-over-year increase in exports seen so far in 2010 is less than expected. Nonetheless, 2010 pork export volumes appear to be contributing to total US pork demand that is sufficiently large to maintain very strong hog and domestic pork prices in a US market environment where supplies are year-over-year lower.

Exports to NAFTA partners Mexico and Canada continued year-over-year higher in August, while shipments to most Asian countries continued relatively weak. The 10 largest foreign destinations for US pork in the January-August period are summarised below.

Trade with the top 10 largest foreign destinations for US pork
(January to August)
Country Aug 2010 Aug 2009 % change
(2010/2009)
Jan-Aug 2010 Jan-Aug 2009 % change
(2010/2009)
World 302 304 -0.75 2,757 2,628 5
1 Japan 93 93 -0.72 873 864 1
2 Mexico 86 81 6 668 545 23
3 Canada 36 31 16 280 251 12
4 Hong Kong 7 23 -68 154 168 -9
5 S. Korea 11 13 -15 151 178 -15
6 Australia 10 12 -12 111 87 28
7 Philippines 5 4 31 90 45 101
8 Russia 9 14 -36 73 194 -62
9 China 14 1 1370 47 47 -1
10 Taiwan 4 6 -31 44 41 10
* Volumes in million pounds cwe
Source: ERS\USDA

US pork imports in August were 83.2 million pounds, an increase of more than 23 per cent over August 2009. For the first eight months of 2010, imports ran about 3.8 per cent ahead of the same period last year. Larger-than-anticipated imports in August are attributable to significantly larger shipments from the two largest sources for US pork imports, Canada and Denmark. Imports from Canada were 19.7 per cent larger than a year ago; imports from Denmark were almost 31 per cent greater than in August 2009. Imports from Denmark, and Canada in particular, could have been larger in the late summer in order to meet US demand for selected pork cuts that were in diminished supply due to lower US pork production.

US imports of live swine – 100 per cent of which were from Canada in August – were year-over-year larger, by 6.7 per cent, for the first time since early 2008. US imports of Canadian finishing animals were 10.4 per cent higher than last August. Purebred breeding animals also registered an increase of 8.1 per cent. Larger volumes of live swine imports suggest that strong US hog prices and lower animal numbers have gained traction to the degree that imports have turned upwards for the first time in more than two years.

Pork Retail Prices Continue To Set Record Highs

For the fourth month in a row, retail pork prices set an all-time high in September at $3.30 per pound. The price reflects lower pork supplies and good consumer demand for pork products. Reports of tightness in availability of some pork cuts in some markets across the United States continued. This situation likely contributed to the 6.8-cent increase compared with prices in August. For the balance of 2010, retail pork prices are expected to average in the low $3-per-pound range.

Further Reading

- You can view the full report by clicking here.


October 2010