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Market Preview: Canadian Breeding Herd Cutbacks Begin to Slow

by 5m Editor
25 August 2009, at 8:55am

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

Canada’s breeding herd continued to shrink in the second quarter but it did so at the slowest rate since the fourth quarter of 2007. Statistics Canada’s Hog Statistics report, released on Thursday, showed the Canadian breeding herd numbered 1.3798 million head on 1 July, down fractionally from the 1 April inventory of 1.383 million head and 4.6 per cent lower than the inventory level on 1 July 2008. As has been the case for all of this large liquidation, the western provinces accounted for more of the decline (down 7.2 per cent) than did the east (down 2.4 per cent).

This reduction in Canada’s breeding herd, when combined with the 2.7 per cent reduction in the US herd on 1 June, puts the Canada-US herd at 7.347 million head, 3 per cent lower than one year ago. The June-July count is 5.2 per cent lower than the herd was at its peak of 7.752 million in October 2007. Several analysts, including me, believe that the combined Canada-US herd will have to decline by about this same amount – 400,000 head – to balance supply and demand at price levels that will be profitable relative to higher costs.

Canadian producers intend to farrow 740,700 sows in the July-September quarter, 7.5 per cent fewer than one year ago. Those intentions rise to 743,700 sows in the October-December quarter, only 2.5 per cent lower than last year. Farrowing intentions in the eastern provinces for the two quarters are virtually unchanged (-0.5 per cent and -0.6 per cent) from last year, meaning virtually all of the future decline will come in the west.

This is almost certainly due to the intense pressure that recent markets have placed on producers who specialize in weaned pigs and that is especially true of those who sell those pigs on spot markets. Figure 2 shows spot prices for 10-lb. weaned pigs – and the picture is ugly to say the least. These prices get hammered from both sides. When lean hog futures fall or corn and soybean meal future rise, the value of these pigs goes down. There have been times this summer when that value was zero and there are few signs of any significant rally now.

Pork Supply, Hog Market Levels Cause Concern

Friday’s Cold Storage report from USDA was yet another piece of bearish, though reasonably expected, news. Pork inventories on 31 July, at 547.331 million pounds, were 8.3 per cent larger than one year earlier, but 27.5 per cent higher than the average for 2003-2007. Ham stocks, though 5 per cent smaller than last year, remain large by historic standards, exceeding the 2003-2007 average by 29 per cent. Belly stocks were only 3.9 per cent higher than last year, while total loin stocks were 16.2 per cent lower than last year.

The problems, from a supply standpoint, in this report are in the "other" and "unclassified" categories. Those two are 25 per cent and 30 per cent higher than last year and they are not small categories. Only the total ham inventory (i.e. the sum of bone-in and boneless hams) at 137.8 million pounds is larger than these two. Stocks of "other" pork totaled 107.3 million pounds on 31 July, while stock of "unclassified" pork amounted to 70.6 million pounds.

We don’t know much about these. They contain a number of processed products, such as sausages and bacon, but we don’t know much else. When they begin to account for a large proportion of total cold storage, it becomes a bit difficult to judge just where the marketing challenges might lie.

31 July cold storage inventories represented 30 per cent of July production. That number is 1.7 per cent higher than last year’s figure, but about in the middle of historical levels. Those have ranged from an outlier low of 23.7 per cent (3.2 per cent lower than all other observations since 1998) in 2001 to a high of 34 per cent in 2000.

Finally, this recent surge in federally inspected (FI) hog slaughter (Figure 4) has everyone concerned about hog numbers this fall. Last week’s run of 2.228 million was only 0.5 per cent lower than last year and 2.7 per cent higher than my forecast level based on the June Hogs and Pigs Report. That makes two weeks in a row that slaughter has been significantly higher than the report suggested. Is it because we backed hogs up with plant shutdowns and slower chain speeds in July? Or, because we have pulled hogs forward with unusually mild summer temperatures? Slaughter weights (201 lb. last week, +6 lb. from last year – again!) can support either argument.