Brian Roe Associate Professor Ohio State University

The critical spring pig crop was 1.2% larger (+315,000 pigs) than last year. These extra US born pigs will be joining about 200,000 additional Canadian feeder pigs that have arrived in the US over the past three months, to yield the potential for an extra half million hogs to pass through the turnstiles of US packing plants during the fall pork production season.

All signs suggest that October-December of 2006 will be the largest single quarter of pork production in US history. However, historical production figures no longer shock the US red meat markets like they once did. Indeed, futures market prices for October and December lean hog deliveries are trading in a rational range, with recent prices (adjusted for typical basis levels and expressed in live weight equivalent) around $45 for October and $42 for December. This is about $2 to $3 weaker than last year’s prices, while production is expected to increase by about 1%.

Of course the interesting question is whether fall hog demand will sustain prices higher than those reflected in recent futures prices. Some analysts hold out the recent strength in hog demand observed during June as a beacon of hope for stronger summer and fall prices. June hog prices were about 8% higher than those observed in June 2005. This strength in prices was driven almost entirely by a decline in the number of hogs going to market – total pork production in June 2006 was down more than 2% from the previous year. In other words, after accounting for the change in supplies, demand for hogs was no different than it was in June of 2005. Compared to previous months in 2006, however, this is very good news. Demand for hogs in February and April of 2006 were much lower than that observed in the same months of 2005.

So the big question is: will hog demand look like June’s demand or will it look like that from earlier in the year? Let’s take the August 2006 futures contract as an example of how hog demand strength can translate in terms of cash prices. Recently the August contract was trading around $70.775 in lean terms, which translates to $52 in live weight terms after adjusting for a typical Eastern Corn Belt basis. The quarterly USDA report puts the inventory of market hogs in the 60 to 120 pound category, which should be sold to market in August, at about ½ % higher than last year. If demand follows June, and is essentially equal with that observed in 2005, the price should increase by about $2 in live weight terms. If demand is closer to that observed in February, the price should decrease by about $4.50.

One interesting item that emerges from the most recent inventory numbers is that productivity in the US breeding herd posted its first year over year decline since 2002. The number of pigs produced per sow held in inventory during the March-May quarter of 2006 was a little lower than last year. This is unusual for an industry that has averaged a 2.5% increase in this most comprehensive of productivity indicators over the past decade. One can decompose the productivity gain into 2 elements: the number of pigs per litter and the number of litters produced per sow. What is notable is that the number of pigs per litter has shown the same type of strong advances as it has for the past decade. The stagnation is purely due to the decline in sow utilization, i.e., the number of litters produced per sow. It may not be a coincidence that the industry is also struggling with Postweaning Multisystematic Wasting Syndrome (PMWS), which can degrade reproductive performance, and may be an indication of how this disease is affecting aggregate US productivity.

Another notable trend has been the dramatic climb in feeder pig imports from Canada. Imports of Canadian feeder pigs grew exponentially during the past decade until hitting a ceiling in 2004. Trade rulings and other circumstances reduced the inflow of feeder pigs during the remainder of 2004 and 2005. However, feeder imports during the spring quarter of 2006 are on target to meet or exceed the previous record set during the spring quarter of 2004. There appears to be a mindset among Canadian sow operation managers to actively seek US locations to finish hogs due to sheer profit motives, i.e., US finishing floors have access to cheaper feed and more slaughter facilities. Indeed, the price of feeder pigs in the Eastern Corn Belt has declined dramatically so far in 2006. Indeed, early wean and feeder pig prices during the spring quarter were 10-20% lower than last year, though recently prices have stabilized at last year’s levels. There is no indication that there is a growth in the Canadian sow herd however. Rather, at this point it appears that there is just a change in strategy by Canadian producers to finish more hogs in the US. While this will modestly increase traffic through US slaughter facilities, it should translate to fewer imports of pork from Canada over the next year.

Brian Roe, Associate Professor, Ohio State University, Agricultural, Environmental and Development Economics

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