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CME: Will Hog Numbers Fall Below Expected Levels?

by 5m Editor
20 October 2009, at 9:46am

US - The government of Canada will announce this Friday how the first $10 million of its Hog Farm Transition Program (HFTP) funding will be spent, write Steve Meyer and Len Steiner in their Daily Livestock Report (DLR) for 19 October.

The program is one portion of a three-part plan to help Canada’s beleaguered pork producers. It will pay producers to take breeding herds out of production while the other two portions will promote Canadian pork exports and provide loan guarantees to enable financially viable producers to secure capital from commercial banks. The HFTP will work like the US dairy buyout programs of recent years. Producers have submitted bids to remove their breeding herds and the program will accept the lowest bids for up to a total of $C10 million in this round. There is $C75 million available and producers will have more opportunities to submit bids after seeing the results of this round of tenders. The entire hog facility — including barns owned by contract growers for the firm — must be idled for three years. The liquidated animals will go into commercial slaughter channels so we expect an increase in the number of cull sows and boars flowing to US processing plants given the lack of sow/boar capacity in Canada. The program is also retroactive to April so producers who have exited the business since that time are eligible for HFTP payments. Last year’s program took about 110,000 head out of Canada’s breeding herd. With retroactive payments claiming a good portion of the $C75 million, this program may not take many more than that out this fall. It all depends on how big the bids are and how many producers want to enroll.

The Department of Justice announced that it will approve the sale of a 64 per cent stake in Pilgrim’s Pride to JBS SA. While that was expected, it is a bit of a surprise the it happened so quickly given the anti-trust, anti-concentration saber rattling that has come from both Justice and USDA under the Obama administration. JBS did not have a position in the US chicken market so this acquisition constituted horizontal integration in the meat protein sector in general and not in any one species. In addition, it has no ramifications on the input side since no chickens are purchased from independent suppliers. All are produced by Pilgrim’s in either companyowned and contracted facilities. Pilgrim’s reorganization plan must still be approved by a bankruptcy court before the deal is finalized. They expect that to happen by the end of the year.

In reviewing Friday’s DLR, we felt some more detail regarding weekly hog slaughter might be appropriate. Last week’s total of 2.295 million head was 2.7 per cent lower than one year ago and, perhaps more importantly, marks the second straight week that total slaughter has been below the level suggested by the September Hogs and Pigs report. The chart below shows actual data for 2008 and 2009 as well as forecast weekly slaughter for the remainder of 2009 and the first three quarters of 2010. This past summer’s extremely high slaughter weights have raised the question of whether hogs were “pulled ahead“ of their normal marketing date due to exceptional performance. Anecdotal evidence has led us to believe the hogs were not pulled forward to any huge degree. That is, the hogs went when they were supposed to go but simply weighed more at that normal marketing date.

The test of that thinking, of course, is whether hog numbers fall below expected levels this fall. The last two weeks were, by our calculations, two of the eight weeks this fall that should have seen FI slaughter levels of 2.3 million or more. USDA’s preliminary estimate for both weeks was just under 2.3 million head. Is this a harbinger of things to come or just random variation? Only time will tell but even these slight reductions in slaughter levels contributed to a cutout value increase of over $2/cwt carcass weight or 4 per cent last week. Hog slaughter usually peaks in late November or early December but the September report and last year’s slaughter pattern suggest that the peak could be early this year. Any reductions from here forward would certainly be welcome news to pork producers.