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Grimes & Plain on the Hogs and Pigs Report

by 5m Editor
28 December 2007, at 4:11pm

US - USDA's December Hogs and Pigs inventory report was a little more bearish than the average of the trade estimates. It showed the total herd up 4.2% (Table 1) while the trade estimates averaged a 3.4% increase.

USDA estimated the breeding herd increased 1.1%, the same as the trade estimates. The market herd was up 4.5% according to USDA; the trade estimate was for a 3.5% larger herd than last year.

We believe live hog prices in 2007 were increased $5-$7 per cwt. by growth in demand. In the January-November period, our live hog demand index was up 3.2% and consumer demand for pork was up 2.3%.

The 2007 average live price of 51-52% lean hogs at about $47.05 per cwt. was only $0.20 per cwt. below 2006 even though pork production was up about 4%. The average 2007 price for non-packer sold hogs, about $65 per cwt., was up about $1.15 per cwt. from 2006. A portion of this increased price in 2007 over 2006 was due to some producers using marketing contracts tied to the futures market or the cost of production and the use of window marketing contracts.

This $5-$7 per cwt. higher price for hogs due to demand growth added $1.4 to $1.7 billion to producer income compared to what it would have been with demand for live hogs at the 2006 level. Pork promotion and pork export enhancement programs probably get most of the credit for this growth in demand.

For some reason that is not clear, live hog demand appears to have developed a cycle. For example, live hogs declined for 13 months in 2002 and early 2003, then had 26 months of growth in 2003, 2004, and early 2005, followed by 13 months of losses in 2005 and 2006. December 2007 was the 18th month of demand growth for live hogs. We are assuming there will be 6 or 7 more months of demand growth in 2008 then demand losses for a year or so. The 26-month period of demand growth in 2003, 2004, and 2005 averaged about 9.9% per month, much more than the average losses for the two 13-month down periods and the 18-month period of growth through December of 2007. For the current 18-month period, the average gain has been about 2.6%. We believe the short-run popularity of high protein diets explains much of the nearly 10% average demand growth which occurred 3 years ago. The 2-3% losses for the two 13-month periods and the 2.6% growth for the 18-month period ending December 2007 is much more difficult to explain. A portion of this demand cycle may be due to a cycle in pork export demand. Whatever else is involved is not known at the current time.

U.S. pork exports for January through October were up 2.9% and for the month of October were up 31.4% compared to the same periods in 2006. The October exports were a record monthly high. Exports for November and December are expected to exceed year-earlier levels. The odds now appear high for 2007 to be the 16th consecutive year of record pork exports. A major reason for the surge in pork exports this fall has been shipments to China. Pork exports to Hong Kong and mainland China were up 111.1% in January-October compared to 2006.

Live hog imports from Canada continue to increase. For January-October, total live hog imports from Canada were up 11.7%, feeder pig imports were up 9.2%, and slaughter hog imports were up 17.3% from a year ago.

Feed prices are expected to continue well above last year as corn, wheat, and soybeans battle for acres. As this material is being prepared, the futures price of corn for the period through July 2009 was $4.53 to $4.83 per bushel. In late 2007, the calculated breakeven hog price for the average cost producer was above $48 per cwt. live. The odds now appear to be near 100% that in 2008 the breakeven price for the average cost producer will be above $50 per cwt. live. Let's hope the cost is in the low $50s.

USDA revised the June and September inventories upward. The June market hog inventories were increased 1.7% and the total herd was increased 1.7%. The September market hog inventories were revised upward 1.6% and the total herd was increased 1.5% from their previous estimate. Very small revisions were made in the June and September breeding herds.

Hog slaughter during December was consistent with the 180 lb. and heavier market inventories (Table 2). The 60-179 lb. market inventories plus continued growth in the number of Canadian slaughter hogs points to a total slaughter in the first quarter of 2008 that is up 4.7% from 2007. For the second quarter, we are estimating total slaughter will be up 5.1% due to larger market hog inventories and slower increases in the number of Canadian slaughter hogs.

First quarter farrowing intentions (Table 3) plus one extra weekday for slaughter suggests slaughter will be up 5.4% in the third quarter. Second quarter farrowing intentions are for a very small increase. However, we are expecting slaughter in the fourth quarter to be up about 1.5% mostly due to productivity growth plus possibly a little increase in the number of Canadian slaughter hogs.

Slaughter in the fourth quarter, projected at 30.750 million head will be close to slaughter capacity. If we do not lose any capacity from the current level, the odds are that slaughter capacity problems likely will be relatively small.

Our slaughter and price estimates by quarter are in Table 4. Our estimates show 2008 slaughter a bit over 4% larger than in 2007.

Table 1. Hog Inventories December 1, U.S.
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 2007 as % of 2006
 Market 104.5
 Kept for breeding 101.1
 All hogs and pigs 104.2
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Table 2. Market Hogs on Farms December 1, U.S.
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 Weight Category 2007 as % of 2006
 Under 60 pounds 104.4
 60 - 119 pounds 103.8
 120 - 179 pounds 104.1
 180 pounds and over 106.1
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Table 3. Sows Farrowing and Intentions, U.S.
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 2007 as % of 2006
 June-August 102.8
 September-November 102.7
 2008 as % of 2007
 December-February 102.4
 March-May 100.1
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Table 4. Estimated Commercial Hog Slaughter by Quarter and Live Hog Prices
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 Commercial Terminal Mkt. 51 52% Lean Non packer sold
 Slaughter Barrow & Gilt Hogs Hogs (avg. net
Period (mil. hd.) (price/cwt) (price/cwt) carcass price/cwt)
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2002 1 24.148 $37.23 $39.43 $54.25
 2 24.280 32.77 34.99 50.43
 3 25.120 31.09 33.86 49.66
 4 26.715 28.52 31.34 46.10
 Year 100.263 32.40 34.91 50.09

2003 1 24.654 $33.32 $35.38 $50.40
 2 23.922 39.86 42.64 58.92
 3 24.747 38.66 42.90 59.27
 4 27.608 34.15 36.89 52.36
 Year 100.931 36.50 39.45 55.25

2004 1 25.717 $40.82 $44.18 $60.56
 2 24.737 51.56 54.91 72.74
 3 25.817 53.72 56.58 74.73
 4 27.192 50.58 54.35 71.58
 Year 103.463 49.17 52.51 69.90

2005 1 25.538 $48.46 $51.92 $69.33
 2 25.030 49.08 52.09 70.25
 3 25.528 46.72 50.51 68.37
 4 27.486 42.20 45.54 61.68
 Year 103.582 46.62 50.02 67.43

2006 1 26.208 $39.23 $42.63 $58.37
 2 24.839 45.81 48.45 65.96
 3 25.810 46.92 51.83 69.13
 4 27.880 41.56 46.13 62.04
 Year 104.737 43.38 47.26 63.86

2007 1 26.686 $41.49 $46.04 $62.69
 2 25.524 48.14 52.55 71.39
 3 26.566 45.07 50.34 69.17
 4 (part. est.) 30,300 33.73 39.30 56.80
 Year (est.) 109.076 42.11 47.06 65.00

2008 1 (projected) 27.935 $34 - 38 $39 - 43 $56 - 60
 2 (projected) 26.825 40 - 45 45 - 49 63 - 68
 3 (projected) 28.000 38 - 42 42 - 46 59 - 64
 4 (projected) 30.750 30 - 34 34 - 38 49 - 54
 Year (proj.) 113.510 36 - 40 40 - 44 57 - 62
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5m Editor