The data seeks to measure inventory levels as of 1 September as was as producer production expectations for the next two quarters.

USDA also updates some of its earlier estimates so that they match the slaughter data for the June-August quarter.

First take: Bearish

Highlights: The latest USDA Hogs and Pigs report will likely be construed as bearish by futures markets when they open this morning. All line items in the report came in above pre-report estimates and the report also had notably bearish implications for prices in the summer and fall of 2015.

One of the key numbers we were watching coming into the report was the breeding herd. The USDA survey pegged the breeding herd at 5.920 million head, 1.8 per cent higher than a year ago and above the average of analysts’ estimates, which was looking for a 1.4 per cent increase.

This is the largest breeding herd inventory since June 2008 and some 163,000 head larger than the breeding herd last December. The increase in the breeding herd implies significant gilt retention during the June-August period as producers responded to the drop in grain prices and all time record profits.

The increase in the breeding herd is also significant given that the pig crop in the previous quarter was down significantly. There appeared to plenty of pent up demand to increase breeding numbers and with improving weather, producers appeared to do just that.

Furthermore, looking at the farrowing intentions for December-Febuary, we can infer that the 1 December breeding herd could increase by more than three per cent compared to the previous year.

At this point, producers are responding to the record profits and strong demand in product markets. The big wild card going forward will be the status of PEDv and what kind of impact it will have on the number of pigs saved per litter.

As producers learn to deal with PEDv infections, we could quickly start to see improvements in the number of pigs saved per litter but it will still take time to return to the growth trends prior to the summer of 2013.

USDA pegged the pig crop for June-August at 29.539 million head, 1.1 per cent lower than a year ago compared to pre-report analyst estimates looking for a 2.4 per cent reduction. While hog slaughter should continue to track below year ago levels into year end, the pig crop numbers suggest that slaughter may not decline as much as earlier expected.

This could put some pressure on the December and February contracts. Two of the more bearish numbers in the report were farrowing intentions for September-November and December -Febuary, which were respectively four per cent and 3.8 per cent larger than a year ago.

The increase in farrowing numbers and an expected improvement in the number of pigs saved per litter (assuming PEDv will be less of an issue this coming year) implies a significant increase in the number of pigs coming to market during the spring and summer of 2015.

The farrowing intentions for December-Febuary would imply a breeding herd of around 5.94 million head as of 1 December, 3.1 per cent larger than the previous year. However, given the pace of gilt retention in June-August and strong profit outlook, we could see breeding herd growth be even higher, which would further bolster farrowings in the winter months Takeaway: Hog producers are responding to market signals and the drop in feed costs.

Pork supplies should increase in 2015 but keep in mind that they will only be modestly higher than the supply levels we saw in 2013. While we expect prices to decline from the inflated levels of 2014, demand remains a key driver for meat protein prices and could offset some of the bearishness contained in this latest USDA report.

Further Reading

You can view the full report by clicking here.