USDA Report Called Ugly

US - If US and Canadian hog producers needed any more cold water to shock them into full-scale contraction, Friday’s Quarterly Hogs & Pigs Report from USDA ought to do it, says Economist Steve Meyer.

2 April 2008

6 minute read

North America

The numbers are huge and point to record slaughter in virtually every time period one wants to discuss in 2008. See Table 1 for the key inventory and farrowing numbers.

It will be critical for exports to continue to grow and for domestic pork consumption to remain high. Even at that, producers will now be looking at carcass-weight cash, negotiated prices no higher than the mid-$60s this summer, with quarterly averages barely reaching that level in the second and third quarters and falling near $60/cwt., carcass, in the fourth quarter.

The best descriptive term I can think of is “ugly.” My price forecasts as well as those of Iowa State University Ag Economist John Lawrence and University of Missouri Agricultural Economists Glenn Grimes and Ron Plain appear in Table 2.

Consider some of the key numbers from the report

The US breeding herd was still growing as of March 1, but the pace has slowed. The March inventory of 6.138 million head was 0.5% larger than last year. That is the lowest year-on-year number since October 2005. This expansion has always been quite modest, with the largest annual increase being 1.8%. While not an actual reduction, this slower pace is welcome news – especially when combined with Canada’s 1.9% January reduction that most felt will be made larger when Canada’s April report is published.

The report passes my “reasonableness” tests with flying colors. The 180-lb. and over inventory, at 11.14 million head, is 7.8% larger than one year ago and agrees almost precisely with March slaughter of U.S.-sourced pigs (i.e. removing the increase in Canadian market hog imports). In addition, Dec.-Feb. farrowings (3.051 million litters or 5% more than last year), pig crop (28.094 million head or 6.4% larger than last year), and under 60-lb. inventory (+7.4% from 2007) all fit together nicely. The differences in the percentages are due to litter size growth and higher imports of Canadian feeder pigs and the numbers are very close.

Litter Boost

Litter size grew at an exceptionally fast rate of 1.3% during the Dec.-Feb. quarter compared to one year ago. I have heard several claims of better performance from circovirus-vaccinated sow herds, but I’ve also heard that the vaccine hasn’t made much difference in some cases. This is the largest annual growth rate of Dec.-Feb. litter size since 1995-1997, when we were trading lower-productivity farms for higher-productivity farms at a rapid pace. That is not the case to any large degree at present, so this gain is mainly being accomplished on existing operations. It will be interesting to see if litter size growth remains high as we go through 2008. The increased incentive to cull less productive sows will only add to this and other productivity factors.

All of the market inventory weight classes show much larger numbers than one year ago. Part of that is due to increased imports of Canadian feeder pigs since last October. I expect that increase to continue, at least until Canada’s sow herd falls enough to restrict the available supply of pigs coming south. I think that will occur sometime this fall, but it depends on what Canada’s April Hog Statistics report says. I’m adding 1.5% to my weekly slaughter estimates from August through the first quarter of 2009 to account for the expected increase.

Figure 1 shows historical federally inspected (FI) weekly hog slaughter and the levels of weekly hog slaughter factoring in the inventory numbers from this report, with two adjustments. First, I adjusted March 1 through April 10 slaughter downward by 4% to account for the slaughter surge in March 2007 that I believe was caused by the first circovirus-vaccinated pigs hitting the market. Second, I added 1.5% to weekly slaughter totals from August through year-end to account for what I expect to be continued high levels of feeder pig imports from Canada. The exchange rate has created a big incentive to feed pigs in the United States. That incentive will be offset by lower sow numbers and, thus, lower pig numbers in Canada by year-end, plus the potential economic impacts of mandatory country-of-origin labeling (MCOOL).

Red Ink

It now appears that producers who have not already priced a substantial number of pigs for 2008 will see rivers of red ink. It will take unprecedented demand, either from exports or domestic sales or, more likely, both to keep this from happening. I do not believe demand can be strong enough, quick enough. We are going to have to go through this and it will not be pleasant.

What is very troubling is that things could definitely get worse. Feed prices could get higher. Large beef supplies are in the offing and chicken and turkey production remains well above year-ago levels. Consequently, there will be substantial competition in the marketplace. Slowing economies may force consumers to trade down in their food choices, giving lower-priced poultry an advantage.

What can we do in the short run? Get those hogs to town as soon as they reach a weight that will not take a price discount. Feed prices are now high enough and hog prices low enough that those last few pounds are getting less and less profitable – to the point of, perhaps, losing money. The opportunity is still limited because we are still running near slaughter capacity each week, but some effort is warranted, given these levels of supply.

Table 1