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Hogs & Pigs Special
USDA's Quarterly Hogs and Pigs report, released Friday
afternoon, Sept. 28, indicates that any hopes of a quick return to
profitability for U.S. pork producers is unlikely. The report's key
numbers (shown in Table 1) were generally significantly larger than last
year and, with only one exception, larger than the average of the
pre-report estimates of industry analysts. And, in my opinion, these
numbers may be low. They generally confirm my long-held and oft-stated
suspicion that U.S. productivity is again on the upswing, largely due to
the effectiveness of circovirus vaccines.
The highlights of the report:
- The U.S. breeding herd continues to grow at a rather modest
pace. Sept. 1 breeding inventories were 1.1% higher than last year.
That's a bit faster than in recent quarters, but not rapid expansion by
any stretch. Still, 66,000 new sows at 23 pigs/litter will add 1.5% to
next year's slaughter.
- The two "reasonableness" tests are okay, but both to the low side.
The 180 lb. and over inventories were pegged at +3.4%, while September
slaughter, after adjustment for one less slaughter day and 30,000 more
Canadian market hogs this year, is up 3.7%. Pretty close. A bit more
concerning is the comparison of the published June-August pig crop to
the inventory of pigs weighing less than 60 lb. The pig crop was shown
as 3.5% larger while the under-60 lb. inventories were listed as only
2.9% larger. After adjusting for 22,000 more Canadian feeder pigs
imported in the June-August time period, the U.S.-only number is +2.8%.
- That June-August pig crop means that Q4-07 supplies are not our
only worries. Large supplies will continue into Q1-08 and likely extend
losses well into next year.
- The report's market hog inventories indicate that Q4 federally
inspected (FI) slaughter will be near 28.5 million head and commercial
slaughter will be roughly 29 million head. University of Missouri
Professor Glenn Grimes predicts that number will be over 29 million
head, including 10 million head in October. Given the fact that
September slaughter has exceeded what the report suggests, I would have
to agree with Professor Grimes and add some to the report's numbers for
the fourth quarter. I certainly don't think 29 million and change is
out of the question.
- I don't believe the farrowing intention numbers for the fall
quarter and I think the spring quarter numbers may be low. To have 1.1%
more breeding animals and then only farrow 0.5% more litters doesn't add
up. Even the +1.3% for Q1-08 may be low if what I am hearing about
circovirus vaccines' impact on sow productivity is true. That
information is based on a very small sample and may also indicate
improvement from very low levels, but we may get more and larger litters
than we expect.
Figure 1 shows historical FI weekly hog slaughter and the levels of
weekly hog slaughter indicated by the inventory numbers from this
report. I strictly use the report numbers in order to provide a clear
baseline. Given the past three weeks' year-over-year comparisons of
+4.4%, +4.8% and +3.9%, I would add 1 to 2% to the report numbers and
that would push several weeks' slaughter totals to 2.3 million head and
The sum of this means that producers are going to see red ink for the
first prolonged period since 2003. Breakeven costs in the upper $40s on
a liveweight basis and mid-$60s on a carcass weight basis just do not
mix with carcass prices below $60 -- and I believe that is what we are
looking at for Q4-07 and Q1-08. My calculations show Q2-08 prices of
around $70/cwt. carcass and Q3-08 prices in the upper $60s.
Chicago Mercantile Exchange (CME) Lean Hogs futures contracts are still
priced above those levels. Some pricing and risk management
opportunities may still be available, even after the sell-off of recent
weeks. Consider any moves you make carefully vs. your feed-cost
Any Bright Spots?
What could change this gloomy outlook? It is obvious that any help must
come from the demand side. A boost in exports would be the quickest and
most likely way of stimulating demand and that certainly could happen
with China's obvious need for pork; 1.3 billion times any number is a
very big number! But, at the moment, these decisions are apparently
driven by politics not economics, so forecasting their course over the
next few months is difficult.
Lower hog prices and lower ham prices could also improve this year's
lagging exports to Mexico. Those lower ham prices likely will only come
after holiday ham needs are met in early December. Still, any
improvement will be helpful.
The downside for pork demand will likely be chicken prices. Higher
broiler output has reportedly already begun to push chicken prices
downward and that will be a drag on pork demand. Many retailers are
already lined up to feature pork in October, but keeping that featuring
activity through the fall may be difficult if chicken prices drop -- and
I think that is a certainty. The question will be the degree of the
Click to view graph.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
North American Preview would like to thank our sponsors, PIC, Boehringer
Novartis Animal Health US, Inc. and Hermitage NGT
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