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US Pork Outlook Report - July 2010

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

Lower numbers of pigs on 1 June are expected to translate into lower pork supplies for the balance of 2010, according to the USDA's Economic Research Service (ERS) Livestock, Dairy and Poultry Outlook report for July 2010.

Summary

The Quarterly Hogs and Pigs report showed lower 1 June inventories, which are expected to translate into lower pork supplies for the balance of 2010. Third-quarter hog prices are expected to average $57-$59 per hundredweight (cwt), 49 per cent above the same period a year ago, and $54-$56 per cwt for 2010.

May pork exports were 18 per cent above May 2009, and for January-May about five per cent above the same period in 2009. Imports for January-May 2010 are running about two per cent behind the same period last year. While total live swine imports were lower in May and for January-May, imports of feeder pigs – animals weighing between 15-50 pounds – were more than 43 per cent higher than during the same period last year, likely reflecting tight hog numbers and higher hog prices in the United States.

Fewer Hogs and Pigs According to June Report

The Quarterly Hogs and Pigs report published by USDA on June 25 showed continued modest reductions in hog inventories. The 1 June inventory of market hogs was almost 3.7 per cent below that of a year ago, while the inventory of breeding animals dropped for the 9th consecutive quarter, to more than three per cent below year-ago levels. The reported inventory changes indicate that pork producers have continued to reduce hog and pig numbers in response to negative returns that began in the fourth quarter of 2007 and abated in the first quarter of 2010. Lower market hog numbers portend lower pork production and continued year-over-year higher hog prices for the balance of 2010. However, continued growth in litter rates may partially offset the effect of fewer farrowings. USDA forecasts 2010 commercial pork production at 22.25 billion pounds, a 3.2 per cent reduction compared with 2009. Hog prices are expected to average $47-$54 per cwt in the third quarter and $49-$53 per cwt in the fourth quarter of this year. These prices represent year-over-year increases of roughly 49 per cent and 24 per cent, respectively.

USDA/NASS recently issued two reports, Acreage and Grain Stocks. The Acreage report indicated that fewer corn acres had been planted than implied by the last Prospective Plantings report. The Grain Stocks report estimated that for the March- May quarter, ending stocks of corn were lower, suggesting larger feed and residual use relative to a year ago. With increased feed and residual use, beginning stocks for 2010/11 were lowered. With lower beginning stocks and reduced production, USDA increased corn price forecasts for 2010/11, as well as the 2010/11 price of 48-per cent soybean meal. For hog producers, higher corn prices mean higher production costs and—everything else equal—lower producer returns. Nevertheless, calculating 2011 producer returns using USDA forecast prices for hogs, corn, and 48-per cent soybean meal suggests continued positive returns for hogs through 2011.

Positive producer returns both this year and next should stabilise the breeding herd beginning next year, and and support a slight increase in 2011 farrowings. Consequently, commercial pork production in 2011 is expected to be 22.7 billion pounds, almost two per cent above the 2010 production forecast. The price of 51-52 per cent lean hogs next year is expected to average $53-$57, or, roughly the same as the 2010 average price.

May Pork Exports Sprint Higher

May pork exports were about 363 million pounds, more than 18 per cent above May 2009. For the first 5 months of 2010, total US pork exports stand at nearly 1.8 billion pounds, or almost five per cent ahead of the same period last year. As in the past, Japan, Mexico and Canada continue to account for more than half of US exports – 65 per cent in May – but so far this year Mexico, in particular, is driving demand for US pork products. In the first five months of 2010, Mexico accounted for 24 per cent of the volume of US exports, compared with 19 per cent last year. Japan, on the other hand has accounted for 31 per cent of exports so far in 2010, compared with 34 per cent a year ago. In May, US pork exports to Mexico were 45 per cent higher than in May 2009, and for the first five months of 2010, exporters shipped 29 per cent more US pork to Mexico than during the same period last year.

May exports to Japan were 13 per cent higher than May 2009, but for January-May were more than three per cent below the same five-month period in 2009.

Factors accounting for Mexico’s step-up in demand for US pork likely include the positive income effects of a return to positive rates of economic growth, compared with last year’s sharp decline, and a stronger Mexican currency against the US dollar. Also, it is likely that there is some degree of substitution going on between relatively high priced US beef and more moderately priced pork products. In the first five months of 2010, Mexico has imported eight per cent less beef than in 2009. It is also worth noting that Mexican imports of US broiler meat have increased 18 per cent so far this year, compared with the January-May period of 2009. Thus, some combination of income recovery and relatively high prices of US beef products is likely driving Mexican demand for US pork and broiler meat this year.

The United States is expected to export more than one billion pounds of pork products in the second quarter and more than 4.3 billion pounds for 2010. Pork exports in 2011 are expected to be about 4.6 billion pounds, more than five per cent above exports forecast for this year.

Imports Lower So Far in 2010

Historically, US second-quarter pork imports average between 4.1 per cent and 4.6 per cent of total US estimated pork disappearance. In the second quarter of 2010, US pork imports are on track to average about 4.4 per cent of estimated disappearance. Imports in May of 65 million pounds were 4.4 per cent ahead of May 2009, but total US pork imports for January-May are running two per cent behind last year. Most of the reduction so far this year is attributable to reduced shipments from Canada. The United States is expected to import 200 million pounds of pork in the second quarter, two per cent above April-June last year. For 2010, US importers will likely bring in 844 million pounds of pork products from abroad, or about one per cent more than 2009.

Imports of Feeder Pigs Strong

US swine finishers and packers imported almost 460,000 head of swine in May, all of which, as usual, were of Canadian origin. May imports were more than 11 per cent below those of May 2009. For the year so far, import numbers are off by almost 16 per cent. Lower imports are no particular surprise, given that the Canadian swine industry has been in a liquidation phase of its hog cycle since mid- 2005. While the largest component of swine imports – animals weighing less than 7kg, known as 'segregated early weans' or sews, were again sharply lower in May (down 23 per cent compared with May 2009) and through May 2010 (down 27 per cent compared with the same period in 2009), one category of imported swine has shown significant gains in each month of 2010. Imports of feeder pigs – animals weighing more than 7kg but less than 23kg – were 34 per cent higher in May, and 43 per cent higher compared with January-May last year.

Lower production costs of heavier weight feeder pigs compared with segregated early-weaned pigs may explain why feeder pigs are attractive to both the Canadian producer (the exporter) and the US hog finisher (the importer). A Canadian pig producer, who sells the animal as feeder pig rather than a segregated early-weaned animal foregoes the relatively high feed costs associated with very young animals (later weaning reduces the need for high-cost replacement diets), and reduces fixed costs by retaining the animal in his/her buildings for the longer growing period.

A US swine finisher who imports a feeder pig rather than a segregated early-weaned animal also foregoes the necessity of specialised labour, facilities and feed. Moreover, with excess finishing capacity currently available in Corn Belt States, barriers to entry to the ‘hog finishing business’ are comparatively low. Prices of feeder pigs shown below reflect, then, lower pig supplies in Canada and the United States, as well as strong finisher demand in the United States.

June Retail Pork Prices Soar

Retail pork prices in June were at a record high of $3.10 per pound, up from $3.04 per pound in May. The June 2010 price represents a 5.1 per cent increase compared with prices in June 2009. For the second quarter of 2010, retail pork prices averaged $3.02 per pound, almost 2.8 per cent higher than second-quarter 2009. The farm-to-retail spread in June, about $2.09 per pound, is much wider than the spread seen earlier in the quarter, suggesting that consumers are beginning to ‘pay the price’ for lower hog numbers and smaller pork supplies.

Further Reading

- You can view the full report by clicking here.

July 2010