The Sterling Marketing Group of Vale Oregon estimated that a week ago, farrow to finish producers were losing $27.00 per head. A $10 early wean means similar losses for farrow to wean producers. There are lots of pigs and the USDA report has market hog inventories at the highest level ever.

Breeding Herd

We are somewhat surprised the breeding herd has only grown 34,000 sows since March 1, 2015 (over 1.5 years). With profits as they have been, we would not have been surprised to see greater expansion.

Certainly, if you had listened to the rhetoric about the boom in sow herd expansion to fill the new packing plants under construction, you would expect more. Now, we have negative profit margins.

We have lived through ten plus hog cycles. We have never seen anything but a decrease in production and breeding herd when there are negative margins. We have negative margins now and it looks like we could have them until May 2017. We expect history will repeat itself, and financial losses will mean less pigs. In the meantime, all hogs are getting marketed. There are enough shackle spaces, with packers that are motivated to buy hogs when their margins are at least $40 per head. Profits are a great motivator.

New packing plants come on stream will need at least a minimum of 120,000-150,000 heads per week by next summer. The September Hogs and Pigs Report shows market inventory up 1.635 million this year over last, on a 26 week (182 days) birth to market cycle, an increase of 63,000 heads per week. To us, it will be really interesting to see how the hog supply works out when new plants come on line. There is no way net expansion will continue with negative margins. Never has, never will. There is no doubt this is a golden time for packers. It is a time they should appreciate, because the $40 plus margins of today will be long gone as the new plants come on stream and a dogfight starts for not only hog supply, but retail shelf space, food service, and export markets. It will be a Clash of the Titans, as all will fight to keep what they have.

Market Inventory

With 1.6 million more market hogs in inventory, finishing space and packing capacity is being challenged. From our observations, hog weights are staying down relative to seasonal trends, as producers feel pressure to keep hogs moving, fearful of exceeding packer capacity. One positive is the inventory under 120 pounds is only 2 per cent higher year over year, which could support December futures.

Other Thoughts

• US sow slaughter data in its latest week is at 60,354. Relatively high number, we need to watch to see if liquidation has started.
  
  
• Feed costs will stay low, record corn crops and cash prices below $3.00 bushel will keep feed prices moderate. Thank goodness we don’t have $5.00 corn and $0.50 lean hogs!
  
  
• USDA has US hog marketing last week at 2,436,000, up 170,000 head from a year ago. This indicates our packing industry’s ability to handle the hogs, but what is really positive is that US carcass cut-outs are $0.74/lb, indicating strong demand in the face of an avalanche of pork.
  
  
• The 170,000 head jump year over year last week in market hogs is interesting when we look at September Hogs and Pigs Report and our calculation of 63,000 more a week expected. We think the number difference is a result of aggressive selling by producers, and aggressive packers motivated by excellent margins and pork getting sold.

Summary

The Hogs and Pigs Report was not an early Christmas for producers. We expect less production going forward from our experience from ten plus hog cycles. Low prices tell us there will be liquidation. The surest cure for low prices is low prices.