The USDA released their inventory report for 1 December last week. No big surprises – fewer pigs and fewer sows.

The US breeding herd has declined 307,000 since December two years ago. A 212,000 decline in the last year. As the breeding inventory declines, it is obvious the United States production capacity declines. 300,000 fewer sows in the last two years takes away the production of six million hogs a year. We believe the US decline is greater than reported. There has been, in our opinion, more sows liquidated and fewer gilts kept. We are not conspiracy advocates by nature but we believe there are fewer breeding animals relative to two years ago.

The US market inventory is down over a million hogs from a year ago. On a 25-week production cycle, 40,000 fewer hogs a week over the next six months year over year. That's price-enhancing and when coupled with liquidation in Canada and Mexico over the last two years, the total market inventory decline for all three NAFTA countries will be about three million head. A huge decline is one of the main reasons market hogs are currently 63 cents lean versus 54 cents a year ago. Less hogs equals higher prices.

In 2008, the USA marketed 116.452 million head. In 2009, it will market approximately 113.650 million. When we look at market inventory down one million, and consider this is about six months production, we come to the farmer arithmetic of about two million fewer hogs for the whole year. Consequently about 111,650 for the year, down about 100,000 head a week from 2008. In 2008, the average 51-52 per cent lean price for the year was $63.58. We now expect 100,000 less a week. Is there any wonder lean hog prices have reached 63 cents during the short weeks of Christmas? The supply is cutting back. It is not surprising a CEO of one of the major packers a few weeks ago speculated on the effects of too few hogs relative to slaughter capacity. That is, what plants will close from lack of supply. Less supply equals higher hog prices.

Early Weans

Cash early wean pigs averaged $43.15 last week with a range from $30-49.50. Fewer pigs and stronger demand has moved prices of a few months ago from under $10.00 to these levels. The USDA average cash early wean price for 2009 was $28.62 (two million head).

Summary

The USDA hogs and pigs report showed no surprises, fewer sows, fewer market hogs and bigger litters. The dynamics of less hogs and improved domestic and global economies are enhancing demand. We expect hog prices will continue to show improvement over the coming months. We see a scenario where lean hogs can reach 90 cents. Even if they don't, lean hogs will be significantly stronger. A year ago lean hogs were 53 cents per pound – now they are 63 cents. Less supply and better demand equals higher prices.